Capital Investment

Capital Investment

v  Known as capital investment and spending on capital goods such as machinery, buildings, and new technology so that the economy can produce more consumer goods in the future.

v  A broader definition of investment includes spending on improving the human capital of the workforce - for example, additional investments in training and education to improve the skills and competencies of employees. .

v  Most economists agree that investment is vital to promote long-term economic growth through improvements in productivity and productive capacity of the country .. .

Gross and Net Investment

Total investment expenditure includes the recognition of depreciation of capital, and since there is a need to replace the old station, some investments in terms of technology and machinery. Provided that the net investment is positive, business and expand their shares of the capital giving them the ability and higher productivity in response to that higher level of demand in the future ... .

The Economic Importance of Capital Investment

Companies invest in many cases in the field of new capital goods for the exploitation of economies of scale of the Interior. This, along with the technological advances that are often built in the new machines, is vital to improve competitiveness in the UK, and causing the shift to overseas production in the country for the possibility of the border .... .

In the short term, you may devote more country in the area of ​​scarce resources for the production of investment goods (a process known as the accumulation of capital) required to cut production today of consumer goods and services (and will be accompanied by low consumption, a rise in saving). Will be a reallocation of resources towards capital goods by the movement from point A to point B on the production limits of probability.

But if the extra investment is successful and leads to an increase in the productive capacity of a country can then be transferred to the PPF and the opening of possibilities for increasing production of consumer goods to meet people's needs and desires. This is shown through the movement from point B to point C to the PPF, which is located on the new PPF after effects of an increase in investment ....

Investment affects AD as well as Aggregate Supply (AS

It should be remembered that investment is also a component of AD. Companies contribute to the development, manufacture, testing, distribution and marketing of capital goods themselves benefit from increased orders for new plant and machinery.

A rise in capital investment and thus have important effects on the demand and supply on both the part of the economy - including the positive multiplier effect on national income.

Demand side effects

Increased spending on capital goods - affects industries that manufacture the technology / hardware / construction

Supply side effects:

Linked to investment to increase productivity, and expand the productive capacity of a country, and reduce unit costs (for example, through the exploitation of economies of scale) - and thus a source of the increase in LRAS (growth direction)

Not only at the level of capital investment that is important but also the quality of this increase in capital. It is permissible for a high level of investment on its own would not be enough to create an increase in LRAS - workers need training on new mechanisms of action, there may be gaps of time between new capital spending and the effects of knock-on production and productivity in particular. Also, if there is insufficient market demand, and perhaps a high level of capital investment leads to excess capacity in emerging industries - downward pressure on prices and profits

One way to remember the importance of investment to consider the CS 3 - capabilities, costs and competitiveness. Investment should be increased to allow for British companies to lower costs of production per unit, and increase their supply capacity and become more competitive in foreign markets.

Key Factors Determining Capital Investment

Spending

Several factors affect the willingness of companies to comply with the investment projects:

v  Real interest rates: interest rates affect the cost of borrowing to finance investment. If the interest rate increase, the cost of financing to increase investment, reduce the expected rate of return on capital projects. The second factor is that higher interest rates raise the opportunity cost to use the profits to finance investment - any action you may decide that the cost of financing new capital is very high, and that he could earn a higher rate of return simply by investing the cash. Low interest rates are not always good news for business investment. Recently economists have become concerned that low interest rates and reduce the cost of capital for companies to the extent that it has been to provide some capital investment projects of low quality and to move forward and a large part of this investment has proven to be disappointing.

v  Rate of growth in demand: investment tends to be stronger when demand rises for consumer goods, and give companies an additional incentive for investment to expand capacity to meet this demand. Higher sales is also expected to increase profit potential - in other words, the price mechanism should be allocated additional funds and factors of production towards investment goods in those markets where demand for consumer goods continues to rise.

v  Corporation tax: companies pay tax on profits. If the government reduces the corporate tax rate (or increase the investment tax allowances) there is a greater incentive to invest. Britain has relatively low rates of company taxation compared with other countries within the European Union. This is one of the factors that help explain why Britain has been a favorite place for inward investment from abroad over the past decade ..

v  Technological change and the degree of competition in the market: in markets where rapid technological change, companies may have to adhere to higher levels of investment to keep pace with technology and shift the border to remain competitive. In markets where there is a commercial project in addition to keeping costs low, but at the same time, achieving year on year gains in the efficiency and quality of service, there is also an incentive to maintain high capital investment spending. ..

v  Business confidence: confidence in the business can be vital in determining whether to proceed with the investment project. When strong confidence would increase planned investments. Confederation of British Industry (www.cbi.org.uk) publishes a quarterly survey of confidence that the economy gives insight into the likely trends in investment in manufacturing - although it must be remembered that more than 70% of the total gross domestic product now comes from the services sector. In recent years, capital spending grew by a strong service companies - but investment in the manufacturing industry and weak .. ..

Business investment and the economic cycle

Investment depends critically on the health of the economy. When GDP growth is strong and inflation under control, then invest in the business so always choose. There is often a time lag involved - take a long time for companies to gain access to capacity constraints and to give the green light for new projects. And the completion of new plans for the investment is inevitably at risk of delay.