Economics 101Chapter15

Economics 101Chapter15 - 1 Objectives for Chapter 15:...

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Objectives for Chapter 15: Explanations of Business Investment Spending At the end of Chapter 15, you will be able to answer the following questions: 1. Define "gross private investment spending" . 2. Define " net private investment spending " . 3. Describe the performance of net investment spending in the United States over the past 30 years. Why is this important? 4. What are the main factors that affect business investment spending? 5. From your answers question #4, what reasons can you give for the poor performance of American business investment spending for most of the past three decades? 6. Why did the performance of American business investment spending improve so much from 1995 to 2000? 1
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Chapter 15: Business Investment Spending (latest revision June 2006) We have encountered business investment spending several times already in the course. Business investment spending has been defined as the buying of capital goods by private businesses . While not the largest form of spending, business investment spending may be the most important. It is important for two reasons. First, the new capital goods that businesses buy increase their ability to produce goods and services . The growth in the standard of living, discussed in Chapter 2, depends in large part on the amount of business investment spending. Second, business investment spending is very volatile . This means that the amount of business investment spending can change greatly from year to year. Much of the business cycle is explained by changes in business investment spending. The economic boom from 1995 to 2000 was largely an “investment boom”. And the recession that began in March of 2001 was largely caused by a decline in business investment spending. In order to understand the effects of business investment spending, we need to distinguish between “gross private investment spending” and “net private investment spending” . Gross private investment spending is the total amount of spending by American businesses on capital goods. Net private investment spending is the amount of gross private investment spending minus depreciation . Depreciation means that certain capital goods are used up or become obsolete during the year . (The word “private” is used here to remind us that we are talking about private businesses, not the government.) Businesses buy new capital goods to replace the ones that have depreciated. In doing so, the businesses are merely making up for what has been lost; they are not able to increase their production. Suppose I have one computer and it becomes unable to function. I replace it for $1000. I have bought a new computer but I am not able to do more than I could when my original computer was working. We would say that my gross private investment spending was $1000 while my net private investment spending was zero. Now suppose I replace it and also buy a second computer for $1000. The second computer increases my ability to produce. So we would say that
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Economics 101Chapter15 - 1 Objectives for Chapter 15:...

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