Capital
From ZuluNotes - Free Leaving Cert Notes
At the end of this section you should know:
Definitions of:
- Capital,
- Capital Deepening,
- Capital Widening,
- Investment,
- Savings,
- Marginal Efficiency of Capital,
- Fixed Capital/Social Capital.
- Factors Affecting Investment,
- Factors Affecting Rate of Interest,
- Keynes Liquidity Preference Theory.
Investment This is the production of Capital Goods. Also called Capital Formation.
Factors Which influence investment
1. Rate of Interest
- The higher the rate of interest
, the higher the cost of borrowing. This means profits will be reduced, which may cause investment to fall.
2. Business People's Expectations about the future
- If people are pessimistic about economic growth falling, tax rates rising, unemployment rising, credit squeeze by banks, then investment may fall.
3. Cost of Capital Goods
- If cost of capital goods is rising, the level of profit that could have been made is falling, so investment may fall.
4. Government Policies
- If these are favourable towards business, for example, lower tax rates, increased grants and decreased regulations, investment may rise.
5. Industrial Relations Climate
- If climate is unfavourable ie, strikes/unrest or workers not open to change, investment may fall.
Keynes Liquidity Preference Theory
J. Maynard Keynes ( 1883-1946) identified three motives for holding money:
1. Transactionary(not affected by interest rate)
- Money for day to day expenses- kept in liquid form for example food/heat
2. Precautionary( slightly affected by interest rate)
- Money needed for emergencies, for examp[le, illness. Can be accessed at short notice.
3. Speculative ( greatly affected by interest rate)
- Money needed for investment which may earn a return, for example, bonds/shares.
