Real investment real investment is counted under gdp

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Real Investment Real investment is counted under GDP. Purchase of new home or by a business of new plant and equipment GROSS INVESTMENT VS. NET INVESTMENT Recall; GDP – depreciation = NNP I g – D = I n I g - A nation’s entire expenditure on plant, equipment and inventory. Inventory Investment is already a net figure Example January 1, 10 machines are bought another 6 during the year. Ig = 6. If 4 machines (of your original 10) wore out or became obsolete during the year, your D = 4 In = 6 – 4 = 2. Other words, you added 2 machines during the year, raising your total from 10 to 12 BUILDING CAPITAL Investment, the building of Capital, takes a great deal of sacrifice. Building Capital - Opportunity costs of building it yourself - Save the money yourself by working over time
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- 6 - - Borrow Essentially, to build up plant, equipment and inventory we need to work more and consume less. All economists agree except Karl Marx. THE DETERMINANTS OF THE LEVEL OF INVESTMENT The sales outlook If you can’t sell your goods, there is no point in investing Capacity utilization Rate The measure of % of plant and equipment that are actually being used at any given time in a factory. Generally this rate is about 80%. When business really gets good, the capacity utilization rate approaches 90%. During severe recessions, this rate dips below 70%. I will not take place when there is a lot of unused capacity. The Interest Rate The cost of borrowing money. Interest rate = Interest Paid Amount borrowed Generally, you won’t invest when interest rate are too high. In essence, investment is inversely related to the rate of interest. THE RATE OF PROFIT: (Marginal Efficiency of Capital (MEC) - JOHN M. KEYNES Most important factor. Expected Rate of Profit = Expected Profit Money Invested The relationship between the interest rate and the expected profit rate was underscored by J.M. Keynes ; The general theory of employment, Interest and Money. Keyes said that every profit opportunity would be exploited as long as the expected profit rate (MEC) exceeded the interest rate: The rate of I will be pushed to…where the MEC in general is equal to the rate of interest. Why do firms really invest?
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- 7 - - Some, mainly to replace worn out equipment - Keep up with the competition What accounts for our low rate of Investment? Low savings low I low economic growth. High rate of interest Graphing investment When income rises, higher levels of I are induced. But for simplicity purpose we assume that the levels of I stay the same at all levels incomes. D.I Expenditures 45 0 Helping Line C C + I
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