Investment+Spending


 * Investment Spending**

Investment spending is referred as the business to business spending on capital goods and changes in inventory. It is an injection in the circular flow. It is autonomous, which means that it is not dependent on the current level of national income. The six determinants of investment spending are: · Changes in interest rates; when interest rates increase, investment spending decreases · Changes in price of capital goods; when prices increase, investment spending decreases · Changes in the age of capital goods (goods that are used to produce other goods); when capital goods get old, investment spending increases · Changes in spare capacity (unused capacity that exists); when there is less spare capacity, investment spending increases · Expectation about future; when optimistic about future, investment spending increases · Changes in government regulation; when bureaucracy increases, investment spending decreases

Investment is a spending hard to predict compare to consumption because investment can be postpone while buying food and clothes are necessities and do not vary a lot with the level of income. Some economists argue that capital investments depend mainly on expectations; the expected return on investments and the expected cost of financing the investment. This means that businesses will be more likely to invest in projects that have a return greater than if the money had been invested in the next best alternative way (opportunity cost).

Reference: http://tutor2u.net/economics/revision-notes/a2-macro-capital-investment.html