Summary

How important is investment to the economy?

Investment is one of the components of aggregate
expenditure. Investment funds come from the public and the
private sectors which are the results of either saving or
borrowing. A major portion of aggregate demand for
products and services is attributed to investment. A change
in investment levels affects the demand for the various
factors of production. Investments also cause increases in the
nation’s output and promote long run economic growth. Why
is investment deemed to have a “multiplier effect”?
Investment is one of the components of aggregate
expenditure. What is the difference between gross and net
investments? Investments may also be classified as either
gross – (those without allowance for depreciation) net –
(those with allowance for replacement of worn-out and
obsolete plant and equipment). What are innovations and
how do they affect the level of investment? The level of
investment is determined by interest rates, innovations, profit
and expenditures. What is the difference between nominal
and real interest rates? Investors are influenced more by the
real rather than the nominal interest rates. The difference
between the two rates is how inflation is regarded. Inflation
is not considered under nominal interest rates. When
determining real interest rates, the inflation rate is taken into
account.