The Accelerator

Question 1

Investment spending

Answer 1

Is simply about the purchase of capital stock/ the addition to the economy’s capital stock.

Question 2

Savings

Answer 2

Savings represent the total amount of income that is by households, businesses or the government.

Question 3

Capital investment

Answer 3

Is spending on machinery, equipment, factories, technology and infrastructure to create new capital goods

Question 4

Gross investment spending

Answer 4

The total amount that the economy spends of new capital. This figure include an estimate for the value of capital depreciation since some investment is needed each year just to replace technologically obsolete or worn out plant machinery.

Question 5

Net investment

Answer 5

Net investment = gross investment - capital depreciation

If gross investment is higher than depreciation, then net investment will be positive.
This means that businesses will have a higher productive capacity and can meet rising demand in the future

Question 6

Planned business investment

Answer 6

• Actual and expected demand for goods and services
• Expected profits and business taxes
• Interest rates + availability of business finance
• Business confidence i.e. animal spirits

Question 7

The accelerator effect

Answer 7

Is a positive relationship between planned capital investment and the rate of change of national income

• E.g. an industry sectors demand may be rising quickly, firms may respond by increasing investment as they believe they will make more profit

Question 8

Accelerator effect - examples

Answer 8

1. Investment in 5G mobile broadband networks, to meet rising household and business demand
2. Investment to expand the amounts of delivery vans/ companies as online spending surges

Question 9

Animal spirits

Answer 9

John Maynard Keynes - a notion of animal spirits which refers to a mix of confidence, trust, mood and expectations.

• When confidence is low, individuals save more, business save more too and, because demand and profits are lower, they cut back on production and sometimes postpone/ cancel capital investment projects

Question 10

Significance of investment for the economy

Answer 10

1. Injection of demand for capital goods industries
2. Investment can lift productivity/ incomes
3. Economies of scale + better competitiveness
4. Investment helps to sustain export led growth

Question 11

Accelerator

Answer 11

• The accelerator is a component in where capital investment is related to the past and expected growth of national income.

Growth leads to investment