May 13
Final Project of
MacroEconomi
cs
Investment
Macroeconomics
201
3
M UMAR
SADIQ
13733
Page 1
Introduction…………………………………………………1
Factor affecting investment…………………………………2

Availability of finance
 Interest rate
 Expected rate of return
Determinants………………………………………………..3


Profit expectation.
Real interest rate
Type of Investment………………………………………….6
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Autonomous and induce investment
Actual investment
Planned investment
Un planned Investment
Real Investment
Net Investment
Financial Investment
Gross Domestic Investment
Investment Demand………………………………………..10
Conclusion……………………………………………………...15
References……………………………………….15
Macroeconomics
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Macroeconomics
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Introduction
Definition
Investment is defined as any use of resources intended to increase future
production output or income.
Some time investment in terms of economics is defined as anything increases firms
production or investment is the addition to the existing Capital stock. Example
Machinery, factory.
Or
Investment is an expenditure on capital good which are expected to yield profits
in the future it has two elements
The purchased of new capital such as equipment and factories
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Factor affecting investment:
1) Availability of finance:
The level of investment in an economy highly depend on availability of
finance which in turn effected by the level of saving there for high MPS will
lead to more investment and low MPS to low ,level of investment in an
economy
2) Interest rate:
Investment is negatively related to interest rate because; high interest rate means
more savings and less borrowing. Therefore the level of investment falls with
increase in interest rate and vice versa.
3) Expected rate of return:
It depends on the following,
The initial cost of capital goods,
Expected cost.
Expected revenues.
Expected productivity
If the expected rate of return is greater than the cost of borrowing (interest rate)
then the firm will invest. If the expected rate of return is less than the cost of
borrowing then the firm will not invest
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Determinants
Two determinants of investment.
a) Profit expectation.
b) Real interest rate
Profit expectation:
Firms take investment in the expectation of earning more profit. They cannot know
how much profit they earn. So they use forecasts of revenues and costs to decide
on an appropriate level of investment. It is their expected rate of return that
actually determines their level of investment.
Many factors effect profit expectations. By this the change of investment
happens. If the firm entering in the market, the following factors effect profit
expectation return:
1) Political change
2) New rules/ laws
3) Subsidies from government
And overall economics are measured by GDP
To calculate the profit expectation we use the formula:
Profit/Cost x 100
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Real interest rate
Real interest rate is the cost of investment if the firm uses borrowed funds it
has to pay interest and increase the firm uses. Its own fund includes oppournity
cost in the form of interest forgone.
To calculate the real interest rate in economics we use the formula
Real I = Nominal – Rate of inflation
Example
Suppose the nominal GPD is 21% and Rate of inflation is 12% now calculate Real
interest Rate?
Solution
Real I= Nominal – Rate of Inflation
= 21- 12
= 9%
From this example the real interest rate is 9%.
Expected rate of return
Re>i
Re=i
Re<i
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Example
Suppose a firm invest $11oo in business by buying a new machine. The firm
expect its total revenue (TR) will increase by $1200. Given interest rate as 7%
should this firm by the new machine?
Solution
Total cost=1100
Total revenue=1200
Interest= 7%
Profit= TR-TC
= 1200-1100
= $100
Re= profit/cost x 100
= 100/1100 x 100
=9.09%
From this example its shows Re>i===>9.09>7. So the firm should buy the new
machine because profit expectation is greater than interest rate. This is ideal
situation for any firm to invest.
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Types of investment:
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a) Autonomous and induce investment:
Is an investment that is not related to level of national income
whereas induce investment change with the level of investment
b) Actual investment:
Is the level which has accrued at the end of the period.
c) Planned investment:
Is the level of investment which firm intent to undertake at the
beginning of the period.
Investment which remains fixed and doesn’t change with the GDP
level is called planned investment.
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Explanation of planned investment graph:
In this graph the planned investment is fixed as 20% although the GDP is increased
by 100 in an economy. But the investment is same as 20 so this is called planned
investment in an economy.
d) Un planned Investment
Investment done without any planning is called unplanned investment.
In this type investor make investment randomly without any plane. Also
investor may not consisdor the objective while making any investment decision.
e) Real Investment
Investment made in new plant and equipment. Construction of public utilities
like School, Roads and Railways Etc. is consisder as Real investment
In this investment new toos and new purchased factories are include. Increase
imployment production in the national and economic growth is occurred by it,
Thus real investment has direct impact on employment generation economic
growth.
f) Net Investment
In this investment less capital consumption during a period of time usually a
year.
It must be noted a part of investment is ment for depraction of the capital assets or
for replanning.
g) Financial Investment
Investment made in buying financial instrutments. Such as new shares securities
etc is consisder as financial.
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h) Gross Domestic Investment
 Public Investment
 Private Investment
i) Gross Domestic Investment
Additions of capital stock in a country that does not include deduction for
depreciation of capital that may have been produce previously
The sum of gross private domestic fixed investment, the change in private
inventories, and government gross investment.
Gross domestic investment is the measure of investment used in GDP formula.
GDI provides an indicator of the future productive capacity of the economy for
GDP. It includes replacement purchases and additions to capital assets plus
investments in inventories. It usually amounts to between 10 and 20 percent of
GDP.
Gross domestic investment includes 3 types of investment including:
 Non residential investment
 Residential Investment
 Change in inventories
Non residential investment:
Expenditures by firms for machines and tools.
Residential Investment:
Expenditures by households and firms on apartments, buildings, and
factories.
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Change in inventories:
The change of inventories in a given period.
Public Investment
A bond is a debt investment in which an investor loans a certain amount of
money, for a certain amount of time, with a certain interest..
Investment demand
Investment demand is the amount of investment demand by an economy at
various expected rate of firm.
Profit Expectation
16
14
12
10
8
6
4
2
0
Macroeconomics
Cumulative amount of
Investment
0
5
10
15
20
25
30
35
40
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Graph:
Real interest = 10 %
Determines of investment demand:
Investment factor are






Operating, maintenance, raw material cost.
Business taxes.
Technology.
Business environment / expectation.
Legal formwork to start business.
Economics / political outlook.
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This factor may affect the shifts of investment demand curve that’s shifts like id to
id1
.
1. Operating maintenance raw material cost
Sub↑→ re↑→id↑ to id1
2. Business taxes.
T↑→re↓→id1↓ to id2
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3.
4.
5.
6.
Business environment / expectation.
Technology.
Legal formwork to start business.
Economics / political outlook.
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Conclusion:
In this project of investment we can explain investment types of
investment and determents that effect investment.
We can explain the types such as NET , PLANNED , ACTUAL ,and some
other including gross investment ,we can discuss investment demand , and
their graphs also history of investment in introduction.
References:
1) Colin Bamford and Susan Grant
Cambridge International AS Second Edition
2) The knowledge Point ( Economics And Business)
3) http://kalyan-city.blogspot.com/2011/06/what-is-investment-meaningand-types-of.html
4) http://www.thefreedictionary.com/Public+investment
5) Class Lectures
6) Economics- Principles, Problems and Policies, By Campbell R.
McConnell and Stanley L. Brue, 17th Edition
Macroeconomics
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Macroeconomics
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