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Chapter 14 Investment and Economic Activity
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- 14.1 The Role and Nature of Investment
- Components of Investment
Chapter 14Investment and Economic ActivityStart Up: Jittery Firms Slash InvestmentIn the recession that began in late 2007 in the United States, the first main element of GDP that faltered was the part of investment called residential structures. When housing prices started falling in 2006, new home construction slowed down. In 2008, this sector had shrunk by more than 40% from where it had been just a few years earlier. In 2008, the part of investment that reflects business spending on equipment ranging from computers to machines to trucks also turned down. The only major part of investment left standing was business spending on structures—factories, hospitals, office buildings, and such. In late 2008, firms around the world seemed to be trying to outdo each other in announcing cutbacks. Among automakers, it was not just the Detroit 3 cutting back. Toyota announced an indefinite delay in building a Prius hybrid sedan plant in Mississippi. [1] Walgreen’s, which had been increasing drugstore locations by about 8% a year, said it would expand by only about 4% in 2009 and by less than 3% in 2010. [2] Package carrier FedEx announced a 20% decline in capital spending, on top of suspending pension contributions and cutting salaries. [3] Even hospitals began scaling back on construction. [4] Companies around the world were announcing similar cutbacks. Consumer electronics maker Sony announced is was not only closing plants but also not moving forward in constructing an LCD television plant in Slovakia. [5] With the drop in oil prices, oil companies were also cancelling planned projects right and left. [6] Choices about how much to invest must always be made in the face of uncertainty; firms cannot know what the marketplace has in store. Investment is a gamble; firms that make the gamble hope for a profitable payoff. And, if they are concerned that the payoff may not materialize, they will be quick to take the kinds of actions cited above—to slash investment spending. Private investment plays an important role, not only in the short run, by influencing aggregate demand, but also in the long run, for it influences the rate at which the economy grows. In this chapter, we will examine factors that determine investment by firms, and we will study its relationship to output in the short run and in the long run. One determinant of investment is public policy; we will examine the ways in which public policy affects investment. Private firms are not the only source of investment; government agencies engage in investment as well. We examined the impact of the public sector on macroeconomic performance in the chapter devoted to fiscal policy. When we refer to “investment” in this chapter, we will be referring to investment carried out in the private sector. [1] Kate Linebaugh, “Toyota Delays Mississippi Prius Factor Amid Slump,” Wall Street Journal, December 16, 2008, p. B1. [2] Amy Merrick, “Walgreen to Cut Back on Opening New Stores,” Wall Street Journal, December 23, 2008, p. B1. [3] Darren Shannon, “FedEx Takes More Measures to Offset Fiscal Uncertainty,” Aviation Daily, December 19, 2008, p. 6. [4] Reed Abelson, “Hurting for Business,” New York Times, November 7, 2008, p. B1. [5] Bettina Wassener, “Sony to Cut 8,000 Workers and Shut Plants,” New York Times, December 10, 2008, p. B8. [6] Steve LeVine, “Pullback in the Oil Patch,” Business Week, December 8, 2008, p. 60. 14.1 The Role and Nature of InvestmentLEARNING OBJECTIVES
How important is investment? Consider any job you have ever performed. Your productivity in that job was largely determined by the investment choices that had been made before you began to work. If you worked as a clerk in a store, the equipment used in collecting money from customers affected your productivity. It may have been a simple cash register, or a sophisticated computer terminal that scanned purchases and was linked to the store’s computer, which computed the store’s inventory and did an analysis of the store’s sales as you entered each sale. If you have worked for a lawn maintenance firm, the kind of equipment you had to work with influenced your productivity. You were more productive if you had the latest mulching power lawn mowers than if you struggled with a push mower. Whatever the work you might have done, the kind and quality of capital you had to work with strongly influenced your productivity. And that capital was available because investment choices had provided it. Investment adds to the nation’s capital stock. We saw in the chapter on economic growth that an increase in capital shifts the aggregate production function outward, increases the demand for labor, and shifts the long-run aggregate supply curve to the right. Investment therefore affects the economy’s potential output and thus its standard of living in the long run. Investment is a component of aggregate demand. Changes in investment shift the aggregate demand curve and thus change real GDP and the price level in the short run. An increase in investment shifts the aggregate demand curve to the right; a reduction shifts it to the left. Components of InvestmentAdditions to the stock of private capital are called Gross Private Domestic Investment (GPDI). GPDI includes four categories of investment:
Figure 14.1 "Components of Gross Private Domestic Investment, 1990–2008" shows the components of gross private domestic investment from 1990 through 2008. We see that producers’ equipment and software constitute the largest component of GPDI in the United States, followed by residential structures and equipment. Figure 14.1 Components of Gross Private Domestic Investment, 1990–2008 
This chart shows the levels of each of the four components of gross private domestic investment from 1990 through the third quarter of 2008. Nonresidential equipment and software is the largest component of GPDI and has shown the most substantial growth over the period. Source: Bureau of Economic Analysis, NIPA Table 1.1.6 (revised December 23, 2008). Data are through the third quarter of 2008. Directory: site -> textbooks textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface Introduction and Background textbooks -> Chapter 1 Introduction to Law textbooks -> 1. 1 Why Launch! textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License textbooks -> This text was adapted by The Saylor Foundation under a textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License without attribution as requested by the work’s original creator or licensee. Preface textbooks -> Chapter 1 What Is Economics? textbooks -> This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 0 License Download 3.61 Mb. Share with your friends:
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