AGGREGATE INVESTMENT EXPENDITURE

Speakers:Princess AduanaEherson Cherwin Otoc

• Investment is the amount of expenditure towards the capital goods (ie. plant and machinery, also 'human capital' - training and education), which are intended to increase productivity, efficiency and output of goods and services.

• Investment refers to the expenditure towards goods that are expected to yield a return or increase their own value over time.

• In national accounting terms, stocks, bonds, mutual funds, and other items whose value is risky, are NOT investments. They fall into the savings account, not the investment account.

Investment Expenditures

Expenditures by the business sector on final goods and services,

in particular, capital goods like factories and equipment,

undertaken in a given time period.

Aggregate Expenditure (AE) formula:

AE = C+Ip+G+Xn

Where:

C = Household ConsumptionIp = Planned InvestmentG = Government spendingXn = Net exports (Exports-Imports)

Planned InvestmentThis refers to the expenditure a company plans to spend in the coming year on inventory and capital goods.

*Note:

-Inventory Investment

-Capital Goods

•

Inventory Investment

- Inventory investment includes both raw materials and finished items.

- Change in the stock of inventories held at business.

It is positive when inventories are increasing, and negative when

inventories are decreasing.

Capital GoodsCapital goods are business purchases

- distinguished from consumer goods- such as new company trucks or

manufacturing equipment.

Planned Investment Formula:

Iu = Ip – IaOr

Ip = Ia + Iu

Where:

I = Investment

Iu = Unplanned Investment

Ia = Actual Investment

Unplanned Investment:

Investment expenditures that the business sector undertakes apart from those they intend to

undertake based on expected economic conditions, interest rates, sales, and profitability. This can be either positive (unintended inventory

accumulation; you produced too much) or negative (unintended inventory decumulation; you

produced too little and had to run down your inventories)

Actual Investment:

Investment expenditures that the business sector actual undertakes

during a given time period, including both planned investment

and any unplanned inventory changes.

Planned Investment Formula:

Iu = Ip – IaOr

Ip = Ia + Iu

Where:

I = Investment

Iu = Unplanned Investment

Ia = Actual Investment

Iu = Ip – Ia

= 50 cars – 30 cars

= 20 cars unsold

Macroeconomic Equilibrium:

Actual Investment = Planned Investment

Determinants of Investment:

1. Expectations of Future Profitability: Optimism or pessimism of firms about the economy is an important determinant of investment spending.

2. Interest Rate: Borrowing takes the form of issuing corporate bonds or receiving loans from banks. A higher real interest rate results in less investment spending, and a lower real interest rate results in more investment.

3. Taxes: Firms focus on the profits that remain after paying taxes. Investment tax incentives provide firms with tax reductions to increase their spending on new investmentgoods.

4. Cash flow: The difference between the cash revenues received by a firm and the cash spending by the firm. The greater its cash flow and the greater its ability to finance investment.