Investment and Economic Activity

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• Investment and Economic Activity
• Read Chapter 14 pages 296-307
• I The Role and Nature of Investment
• A) Investment adds to the nations capital
  stock and thus shifts the production function
  upward.
• B) Investment is a component of aggregate
  demand.

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• C) Components of Investment
• 1) Nonresidential structures.
• 2) Non residential Equipment and Software.
• 3) Residential Structures and Software.
• 4) Change in Inventories.
• D) Gross and Net Investment
• NPDI GPDI-depreciation. The largest part
  of GPDI is depreciation.

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• E) The Volatility of Investment
• Investment is by far the most volatile
  component of GDP
• F) Investment, Consumption and Saving
• The following figure shows that by reducing
  consumption today and thus increasing savings and
  investment, the production possibilities curve
  will shift outward.

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• II Determinants of Investment
• A) Interest Rates
• The investment demand curve for the economy
  is a curve that shows the quantity of investment
  demanded at each interest rate, with all other
  determinants of investment unchanged.

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• B) Expectations especially for future profits.
• C) The level of economic activity.
• D) The current stock of capital
• E) Capacity Utilization The capacity
  utilization rate measures the percentage of the
  capital stock in use. Typically in the low 80s
  in percentage terms.
• F) The cost of capital goods.
• G) Other factor costs, especially labor.
• H) Technology change.
• I) Public policy, especially tax policy.

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• III Investment and the Economy
• Investment and Aggregate Demand.
• A reduction in interest rates will stimulate
  investment spending which will result in a
  multiple increase in aggregate demand.
• B) Investment and Economic Growth.
• An increase in investment will increase
  productive capacity, thus shifting the production
  possibilities curve and the long run aggregate
  supply curve outward.