Economics Department

 

Investment Worksheet

 

 

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1)      Define Investment                                                                                                   (2 marks)

2)      Explain the difference between Gross Investment and Net Investment                      (3 marks)

3)     
Using the chart above, describe the UK's record on Investment compared with that of the US and the rest of Europe.                                                                                                                  (4 marks)

4)      Discuss the possible implications for the UK Economy of the record of Investment shown.                                                                                                                                             (5 marks)

5)      Discuss possible reasons for the surge in Investment between 1996 and 2001.

            (5 marks)

 

 

 

6)      Explain possible reasons for the pattern in Investment shown in the diagram

            (5 marks)

7)      Why might Investment spending be so much more volatile than Consumption spending and GDP as a whole?                                                                                                                 (5 marks)

 

Continued on next page

Source: CBI, tutor2u.net                                                                        Source: Bank of England

 8) Using MEC theory and diagrams, predict the likely theoretical impact on Investment of the changes shown in the charts             (i) 1990-94 and (ii) 1996-99

                                                                                                                        (4 marks)

9) To what extent does your prediction agree with the findings in charts on the last page?

                                                                                                                  (5 marks)

 

10) Discuss possible reasons for any differences.                                               (5 marks)

 

Investment has long been positively associated with high Economic growth, although the causation involved has always been a vexed issue - does high Investment, by expanding the Economies production potential, raise economic growth? Or is it rapid growth that requires greater and great levels of capital stock to support it? Whatever may be the case, it is a fact that over its recent Economic history the UK has had both low rates of relative Investment and slow growth relative to the rest of the G7. As a result, the Government has made in vestment an important economic goal. The UK Government has sought to boost Investment in several main ways.

 

Firstly it has attempted to boost confidence. This has been attempted through making the Bank of England independent (back in 1997), and setting it a rigid inflation target. The aim of this was to convince businesses that the Government was determined to ensure economic stability. Low inflation also helps businesses to forecast returns on Investments more accurately, again boosting confidence.

 

Secondly, achievement of low inflation has allowed interest rates to be reduced, in line with the Fisher hypothesis (that real interest rates will be approximately constant in the long run). This has helped to defray both the actual and opportunity costs of Investment.

 

Thirdly, in recent budgets, the Government has used Fiscal Policy to create incentives for Investment, such as tax write-offs on both capital Investment and R&D spending, reductions in capital gains tax, and increased access to venture capital for small firms.

 

The Government hopes that all of this will help the UK to bridge the productivity gap which exists between the

 UK and its leading international competitors:

 

Index of Output per Worker (UK=100)

 

11) Which of the actions described do you feel will be the most effective in boosting Investment in the UK                                                                                                                                             (5 marks)

12) Using all the information above, how important do you think investment is for the UK economy?                                                                                                                                                      (7 marks)

                                                                                                           

 

                                                                                                                                                (55 marks)

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