1) Investment refers to spending by firms on capital goods like equipment and buildings to produce more goods in the future. It made up 17% of UK GDP in 2018. 2) Determinants of investment include interest rates, business confidence, availability of finance, profitability, productivity of capital, government policies, and economic growth prospects. 3) When economic growth is positive, firms are more willing to invest as they expect future demand to rise, following the accelerator effect where increased output requires more capital.

1. Investment
Lower 6th Macro
Aggregate Demand

2. Intro to
Investment
Investment
Mr O’Grady

3. Intro to Investment
Definition: spending by firms on capital goods, such as equipment and new
buildings, to produce more consumer goods in the future.
This includes spending on working capital such as stocks of finished and semi-finished goods.
Stat: Investment made up 17% of UK GDP in 2018
A broader definition: Investment also includes spending on improving the human
capital of the workforce through training and education
Distinction between Capital Investment and Financial ‘Investment’:
Investment in the AD sense only accounts for spending by firms on capital
Financial ‘investment’ refers to households saving their money in financial products such as
stocks and shares, saving accounts with a bank, or various other financial products
This is not part of AD as no new output is produced
Households DO NOT invest!

4. Determinants
of Investment
Investment
Mr O’Grady

5. Determinants of Investment
Interest rates: Investment is financed either out of current savings (retained
profits) or by borrowing. High interest rates act to reduce the level of investment.
Higher interest rates make it more expensive to borrow, and also give a better rate of return
from keeping money in the bank
Investment has a higher OC as firms lose out on the interest payments on retained profits
Business Confidence: Investment in new capital is expensive and can be a very
risky commitment.
Animal spirits: refers to the level of confidence or pessimism of consumers and firms.
Future expectations will influence decisions made today about how much consumers are
prepared to spend or save and the willingness of businesses to commit funds towards capital
investment.
Firms must feel optimistic about the state of the economy before undertaking such high
spending.
E.g. A boom improves expectations of future demand. Firms are willing to buy more capital.
Availability of finance: For investment to be funded by borrowing, banks must be
willing to lend to businesses
E.g. In the credit crunch of 2008, banks were very reluctant to lend to firms for investment.
Despite record low-interest rates, firms were unable to borrow for investment.

6. Profitability: If firms have more profits, they have greater funds with which to
purchase new capital, expand existing factories, etc.
Productivity of capital: Long-term changes in technology can influence the
attractiveness of investment.
A high rate of technological progress means firms will increase I as there are higher returns.
Government Policies: Some government regulations can make investment more
difficult.
For example, strict planning legislation can discourage investment.
On the other hand, government subsidies/tax breaks can encourage investment.
However, it can also affect the quality of investment as there is less incentive to make sure the investment
has a strong rate of return.
Economic Growth: Firms invest to meet future demand.
If economic prospects are positive, firms will increase I as they expect future demand to rise
Investment is cyclical, demand for capital is driven by the demand for its product
The Accelerator Effect: when an increase in GDP results in a proportionately larger rise in
capital investment spending.
At full capacity, in order to increase output by a small proportion, new capital is needed.
This is likely to represent a large proportional increase in I

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