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Questions and Answers
According to economists, which of the following activities is NOT considered an investment?
According to economists, which of the following activities is NOT considered an investment?
- The construction of a new residential building.
- The purchase of new equipment by a manufacturing company.
- The purchase of shares in a stock market. (correct)
- An increase in a firm's inventory of unsold goods.
Which component of Gross Domestic Product (GDP) is known to be the most volatile?
Which component of Gross Domestic Product (GDP) is known to be the most volatile?
- Consumption
- Net Exports
- Government Purchases
- Investment (correct)
In the context of national income accounting, which of the following is included as part of gross private domestic investment?
In the context of national income accounting, which of the following is included as part of gross private domestic investment?
- Business spending on plant and equipment (correct)
- Consumer spending on durable goods
- Government bonds
- Household spending on education
If a firm adds $500 billion to its inventories during a year, but sells, uses, or finishes $400 billion worth of stuff, what is the net change in inventories that should be accounted for in GDP?
If a firm adds $500 billion to its inventories during a year, but sells, uses, or finishes $400 billion worth of stuff, what is the net change in inventories that should be accounted for in GDP?
If a firm adds $300 billion to its inventories, but sells, uses, or finishes $700 billion worth of stuff, what is the net change in inventories?
If a firm adds $300 billion to its inventories, but sells, uses, or finishes $700 billion worth of stuff, what is the net change in inventories?
Which of the following is the MOST accurate description of 'change in inventories' as it relates to investment in GDP?
Which of the following is the MOST accurate description of 'change in inventories' as it relates to investment in GDP?
Which of the following best describes why investment is considered important for economic growth?
Which of the following best describes why investment is considered important for economic growth?
If interest rates increase, how is a firm's decision to invest MOST likely to be affected, assuming all other factors remain constant?
If interest rates increase, how is a firm's decision to invest MOST likely to be affected, assuming all other factors remain constant?
Which of the following would most likely lead to an increase in planned investment spending by firms?
Which of the following would most likely lead to an increase in planned investment spending by firms?
If firms become more pessimistic about future profitability, what is the likely effect on investment?
If firms become more pessimistic about future profitability, what is the likely effect on investment?
Which of the following factors would NOT be a determinant of investment decisions?
Which of the following factors would NOT be a determinant of investment decisions?
How do investment tax credits typically affect firms' decisions regarding investment?
How do investment tax credits typically affect firms' decisions regarding investment?
In 2023, which of the following components accounted for the largest percentage of total investment?
In 2023, which of the following components accounted for the largest percentage of total investment?
A company is considering investing in a new project. Which of the following scenarios would make the project LESS attractive?
A company is considering investing in a new project. Which of the following scenarios would make the project LESS attractive?
According to the basic macroeconomic identity, what is the relationship between aggregate expenditure (AE) and the components of GDP?
According to the basic macroeconomic identity, what is the relationship between aggregate expenditure (AE) and the components of GDP?
Which of the following is the mostly likely impact or higher interest rates on the housing market?
Which of the following is the mostly likely impact or higher interest rates on the housing market?
Which of the following transactions represents an investment, as defined by economists, and is included in the calculation of GDP?
Which of the following transactions represents an investment, as defined by economists, and is included in the calculation of GDP?
What is the correct formula for net exports (NX)?
What is the correct formula for net exports (NX)?
If a significant portion of a country's labor force becomes more productive due to technological advancements. How would this affect investment?
If a significant portion of a country's labor force becomes more productive due to technological advancements. How would this affect investment?
If total exports are $2506 and total imports are $3431, what is the net export?
If total exports are $2506 and total imports are $3431, what is the net export?
Which of the following describes correctly the equation: Y=C+I+G+NX
Which of the following describes correctly the equation: Y=C+I+G+NX
What percentage of total capital raised by firms comes from the sale of ownership shares (stocks)?
What percentage of total capital raised by firms comes from the sale of ownership shares (stocks)?
Which of the following transactions is considered an investment as defined by economists?
Which of the following transactions is considered an investment as defined by economists?
In the context of macroeconomic analysis, what does the term 'investment' primarily refer to?
In the context of macroeconomic analysis, what does the term 'investment' primarily refer to?
How does increased investment in new capital affect a country's production possibilities frontier (PPF)?
How does increased investment in new capital affect a country's production possibilities frontier (PPF)?
In 2023, which of the following components took up the smallest percentage in total investment
In 2023, which of the following components took up the smallest percentage in total investment
What is most of the money raised?
What is most of the money raised?
When looking at the equation r I, given all other data which of the following happens?
When looking at the equation r I, given all other data which of the following happens?
How do investment tax credits affect companies facing taxes?
How do investment tax credits affect companies facing taxes?
A firm that wants to finance an initiative usually has 4 different ways to:
A firm that wants to finance an initiative usually has 4 different ways to:
When accounting for GDP, what part is the most volatile in determining aggregate expenditure?
When accounting for GDP, what part is the most volatile in determining aggregate expenditure?
Firms finance initiatives by borrowing money as an alterative, where does this come from?
Firms finance initiatives by borrowing money as an alterative, where does this come from?
Which of the following is impacted by high productivity?
Which of the following is impacted by high productivity?
How does investment drive capital? Which answer is MOST correct.
How does investment drive capital? Which answer is MOST correct.
How will increased productivity change the investment landscape?
How will increased productivity change the investment landscape?
How can we account for unfinished goods?
How can we account for unfinished goods?
What is most likely to happen if a product is made that isn't sold yet?
What is most likely to happen if a product is made that isn't sold yet?
Which of the things are factors of investment?
Which of the things are factors of investment?
Which of the following transactions does NOT constitute an investment?
Which of the following transactions does NOT constitute an investment?
Flashcards
What is investment?
What is investment?
Spending on new plant, equipment, software; new housing; and changes in inventories.
Largest component of investment
Largest component of investment
Plant, equipment, and software collectively represent 81% of all investment.
What is the role of housing in investment?
What is the role of housing in investment?
Represents about 18% of total investment.
What are inventories?
What are inventories?
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What matters, inventories or change in inventories?
What matters, inventories or change in inventories?
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How do inventories change?
How do inventories change?
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What is an example of a negative change in inventories?
What is an example of a negative change in inventories?
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Why is investment important?
Why is investment important?
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Why is investment vital to economic growth?
Why is investment vital to economic growth?
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Determinants of Investment
Determinants of Investment
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Interest vs. Investment
Interest vs. Investment
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What are a firm's financing alternatives?
What are a firm's financing alternatives?
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Where do firms get funds?
Where do firms get funds?
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Study Notes
- Investment
- Investment is a key component of aggregate expenditure.
- Investment is important to understand because it has a large impact on the economy.
Important Identity
- Y = C + I + G + NX
- Y represents the value of total output
- C + I + G + NX this represents aggregate expenditure
- This identity is fundamental in macroeconomics.
- GDP = Aggregate Expenditure (AE)
- Y = C + I + G + NX
- NX = X - IM, where X is exports and IM is imports
What Economists Mean by Investment
- Investment, in economic terms, is different from the common usage of the word.
- Purchasing stocks, opening savings accounts, investing in small businesses, or buying rare coins doesn't count as investment.
- These activities don't add to GDP.
Components of Investment
- Components include:
- Plant & Equipment
- Housing
- Change in Inventories
Plant, Equipment, & Software
- Plant, equipment, and software constitute about 81% of all investment in 2023.
Housing
- Housing constituted about 18% of all investment in 2023.
Change in Inventories
- Change in inventories accounted for about 1% of all investment in 2023.
- Inventories are:
- Finished goods that haven't been sold yet
- Raw materials that firms have bought but not yet used
- Goods still in the middle of the production process
- What matters in GDP calculations is the change in these inventories.
- If firms add 500Btotheirinventories,includingunsoldgoods,rawmaterials,andin−processproducts,butsellorfinish500B to their inventories, including unsold goods, raw materials, and in-process products, but sell or finish 500Btotheirinventories,includingunsoldgoods,rawmaterials,andin−processproducts,butsellorfinish400B worth of stuff, the net change in inventories is +$100B.
- If firms add 300Btotheirinventories,butselloruse300B to their inventories, but sell or use 300Btotheirinventories,butselloruse700B worth of stuff, the net change in inventories is -$400B.
US Real GDP and Components (2023)
- Gross Domestic Product: $22,375
- Personal Consumption Expenditures: $15,422
- Goods: $5,390
- Durable goods: $2,044
- Nondurable goods: $3,357
- Services: $10,060
- Gross Private Domestic Investment: 4,055−FixedInvestment:4,055 - Fixed Investment: 4,055−FixedInvestment:3,960 - Nonresidential: 3,268−Structures:3,268 - Structures: 3,268−Structures:623.2 - Equipment: 1,248−IntellectualPropertyProducts:1,248 - Intellectual Property Products: 1,248−IntellectualPropertyProducts:1,397 - Residential: 734.5−ChangeinPrivateInventories:734.5 - Change in Private Inventories: 734.5−ChangeinPrivateInventories:50.6
- Government Purchases: $3,817
- Federal: $1,481
- National Defense: $827.7
- Nondefense: $653.1
- State and Local: $2,336
- Federal: $1,481
- Net Exports of Goods and Services: -$925.5
- Exports: $2,506
- Goods: $1,696
- Services: $813.4
- Imports: $3,431
- Goods: $2,838
- Services: $597.1
- Exports: $2,506
- Components of 2023 US Real GDP include:
- Consumption: 68.9%
- Investment: 18.1%
- Government Purchases: 17.1%
- Net Exports: -4.1%
- Exports: 11.2%
- Imports: 15.3%
Why Is Investment Important?
- Investment is the most volatile component of aggregate expenditure.
- Investment is vital to economic growth.
- Investment = change in capital = ΔK
Why Productivity Is Important
- When a nation's workers are very productive, real GDP is large and incomes are high.
- Rapid productivity growth leads to higher living standards.
- Productivity and its growth depend on technological change and capital.
Determinants of Investment
- Expectations of future profitability.
- Optimism or pessimism can greatly influence investment decisions.
- Corporate income tax and investment tax credits.
- Cash Flow.
- Real interest rate.
The Interest Rate
- As the real interest rate "r" increases, investment "I" tends to decrease (r↑ → I↓).
- It becomes more expensive for firms to borrow for equipment and buildings.
- It becomes more expensive for families to borrow for houses.
- As the real interest rate "r" decreases, investment "I" tends to increase (r↓ → I↑).
Financing Alternatives
- Borrow the Money
- Bank Loans (15%)
- Bonds (7.5%)
- External Funds
- Sell Ownership Shares in the Company
- Stocks (2.5%)
- Use Their Own Savings
- Retained Earnings (75%)
- Internal Funds
- Retained Earnings (75%)
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