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Introduction to Investment

• Investment theory is divided into two main branches: macroeconomics and microeconomics.
• Investment is a macroeconomic variable that encompasses more than just creating new production capacity for new ventures; it also includes maintaining existing capacity within existing enterprises.
• Investment is a dynamic element linked to time and interrelated with other macroeconomic variables, such as savings and income.

Importance of Investment

• Investment acts as a primary driver for economic growth and development within any society.
• All nations, regardless of their political or economic systems, acknowledge the significance of investment.
• Investment is crucial for expanding the production base, increasing productivity, and subsequently boosting national income levels.

Definition of Investment

• Investment is the creation of an economic entity and the expansion of its capabilities, specializing in the creation of goods and services.
• Investment involves a current monetary outlay to acquire future profits.
• Key investment objectives include earning profits (wealth accumulation), securing future needs, and maintaining assets' value while dealing with possible uncertainties related to future returns and unforeseen events.

Investment Uncertainty and Risk

• Investment decisions are made with the understanding that there is uncertainty regarding future cash flows.
• This uncertainty arises from various global, national, and project-level events and occurrences.
• These factors introduce risks into investment decision-making.

Investment Decisions

• Investment decisions are influenced by individual investors' risk tolerance and expected returns.
• Optimal investment strategies aim to maximize returns while taking appropriate precautions to manage risk for the invested capital.
• Investment spending plans are among the top priorities of financial management.

Types of Investment

• Real Investment: These investments involve tangible assets, leading to increased productive capacity of the economy, such as construction of new residential buildings, factories, and machinery.
• Inventory Investment: This involves accumulating goods and merchandise that may not automatically increase the production capacity of the entire economy but could lead to better operation processes.
• Export Surplus Investment: This is calculated by taking domestic production and adding the net value of exports. It's categorized based on how resources are used: consumption and investment (including inventory).
• Optional Inventory: Inventory to keep businesses running, and adjustments are made as needed.
• Compulsory Inventory: Inventory changes due to errors in production estimates or demand projections. This inventory increase, in reality, should be considered as investment, given the resources going into it are effectively invested for future use.
• Productive Investment: Investments that directly contribute to enhancing the economy's productive capacity, including those in manufacturing, services and (generally) not living spaces.
• Non-Productive Investment: Investments for purposes that indirectly or not at all contribute to output, such as building improvements, and may include items not necessary for production, like residential properties.
• Foreign Investment/Domestic Investment: Investment can be carried out by domestic or foreign entities (individuals).
• Short-Term Investment: These investments are undertaken for quick liquidity and modest returns.
• Medium-Term Investment: Investments with a duration of more than two years and less than five years, typically aligned with strategic goals.
• Long-Term Investment: Lasting more than five years, these projects significantly impact the economy.
• Real Investment (Tangible): Investments in physical assets.
• Financial Investment (Monetary): Investments in financial instruments that entail purchasing assets without necessarily impacting overall productive capacity of the economy.

Investment Markets

• Investment markets are categorized as real (goods and real estate) or financial (stocks and bonds).

Factors Affecting Investment Decisions

• Interest Rates: High interest rates generally result in lower investment levels.
• Profitability: Higher expected returns generally result in higher investment.
• Changes in Income/Output: Investment is sensitive to output variations (greater variations in output lead to higher investment).
• Savings Rate: An increase in saving typically leads to an increase in the capital available for investment.
• Technology: Technological advancements lower production costs and encourage additional investment.
• Population Growth: Larger populations increase the need for goods and services, thus often encouraging investment.
• Incentives: Incentives and subsidies provided by the government impact investment decisions.
• Economic Outlook: Optimistic or pessimistic perspectives on the future significantly affect investment decisions.
• Taxes: Tax policies play a major role in investment decisions.
• Overall Market Trends: The overall economic environment has an impact on market demand, in turn influencing investor behavior.
• Foreign Trade Policy: A nation’s trade policies, especially those related to exports and imports, play a role in investment decisions.
• Monetary Policy: Monetary policy, encompassing the use of interest rates, influences the cost of capital and thus investment rates positively or negatively.
• Fiscal Policy: Fiscal policy choices, such as government spending and tax policies, directly affect the conditions for investment in the market.