Investment Defined as addition to the capital stock of the economy Factories, machinery Not purchase of shares, putting money in the bank etc. This is often called “investment” but for economists this counts as saving Investment, yes or no: Building a factory? HS2 project? Buying a government bond so the government can build HS2? Buying iPads for students in a school? Which of the above are Investments in Physical Capital vs Human Capital? Is ‘investment’ a stock or a flow concept?

Gross and net investment Existing capital stock ‘depreciates’ as it wears out over time and needs replacing How long do pcs last? If SHS has 400 pcs, how many does it need to buy each year on average to replace old ones? If SHS buys 150 each year: Gross investment is 150; Depreciation or ‘capital consumption’ is 100 Net investment is 50 Gross investment* = total investment Net investment = gross investment – depreciation *Gross Investment = Gross Fixed capital Formation in UK Stats

Investment Recap: Definition of Investment? “The addition to the capital stock of the economy” Is buying shares an economic investment? What about buying machinery or education – what are these types of investment? What is Depreciation? “Existing capital stock ‘depreciates’ as it wears out over time and needs replacing”

Depreciation Worked example The school owns a stock of 100 PCs originally costing £100 each, with a 5 year life. Depreciation is 100 PCs x £100/5 years = £2,000 per year Gross investment is the total investment spending in any year, so if the school buys another 200 PC’s at £100 each what is the Gross Investment? Net investment is: Gross Investment minus Depreciation £20,000 - £2,000 = £18,000

Calculation Exercise Calculate annual depreciation of 50 PCs originally bought at £500 each with a 5 year lifespan Calculate Gross Investment when the school buys another 100 PCs at £500 each Calculate Net Investment using the figures above

What influences investment Interest rates (a move along the grey curve) Rate of economic growth Business expectations / confidence (Keynes ‘animal spirits’) vs Risk Availability of credit Government regulations and taxation Technology and Innovation (Retained) profits – perhaps its not all about Interest Rates? I-1 I0 I1