Essay Plans

What determines investment?

SYNOPSIS:

This question is often asked in 'A' level papers and is a useful springboard for other enquiries encompassing Keynesian v Monetarist viewpoints.

POINTS:

  1. Define the different types of investment:

    Replacement
    Public
    Social
    Gross
    Net
    Private

  2. Remember the four main theories:

    Loanable funds
    Accelerator
    Marginal efficiency of capital (DCF and IRR)
    Marginal productivity of capital

  3. For the purposes of this essay, investment is defined as expenditure on new plant and capital equipment and changes in stocks.

  4. Discuss the main determinants using graphs (MEC, MPC) and numerical examples (Accelerator):

    • Loanable funds (based on marginal productivity theory of individual investment decisions) equates the demand for investment funds with the supply of savings. This theory determines the rate of interest in the goods market of the economy; in the Keynesia theory the value of the rate of interest is determined in the money market.

    • Marginal efficiency of capital: simplified - invest up to the point where the MEC equals the rate of interest. Invest therefore where the present value i.e. return on investment is greater than the cost (rate of interest) of the investment. This Keynesian theory takes into account the future value of the investment and discounts the returns to present day value (see DCF).

    • The accelerator theory states that an increase in demand leads to a disproportionate increase in investment based on several assumptions eg. a constant capital - output ratio.

This essay is therefore based around these theories and factors that effect the elements of these theories. Thus the expansion would include the factors that affect expectations:

Economic growth
Unemployment
Balance of Payments
Current industrial action
General state of the economy

Also, cost of capital equipment and the rate of interest. The availability of finance, innovation and technology, the cost and availability of labour (isocosts/isoquants) and tax relief on investment expenditure (regional policy). Back-up material from CBI surveys plus any latest predictions from reputable forecasting groups would supplement the points made.

©2005 Oxford School of Learning Ltd. 66 Sunderland Ave, Oxford OX2 8DU. Tel: 01865 512428
Company Registered in England No. 02031252
email us | Our Privacy Policy | Accessibility Policy |
Approved by the ATW
Web Design by Bat Design