What is investment

February 23, 2016
What is Investment

• money spent or expenditures on:

(new plants, factories)
-capitol equipment
-technology (hardware and software)
-new homes
-inventories (goods sold by producers)

Expected rates of return

• How does business make investment decisions?

-cost/benefit analysis

• How does business determine the benefits?

-expected rate of return

• How does business count the cost?

-interest cost

• How does business determine the amount of investment they undertake?

- compare expenditure rate of return to interest cost

• expected return > interest cost. INVEST, expect return < interest cost DO NOT INVEST

REAL (r%) v. NOMINAL (i%)

• What's the difference?

-nominal is observable rate of interest. Real subtracts put inflation (n%) and is only known ex post facto.

• How do you compute the real interest rate (r%)?

-r%= i% -n%

• What then determines the cost of an investment decision?

-The interest rate (r%)
Investment demand curve
Shape of the demand curve
-downward sloping

• Why?

-interest rates are high, fewer investment are profitable; when interest rates are low, more investments are profitable.

Shifts investments demand (ID)
-costs of production
-lower costs shifts ID ->
-higher cost shift ID <- p="">
business taxes
-low business ID ->
-higher business ID <- p="">-technological change
-New technology ID ->
-lack of tech. ID <- p="">-stuck of capital
-economy is low on capital ID ->
-economy has much capital ID <- p="">expectations

• positive expectations shift ID ->
• negative expectations shifts ID <- li="">