investment demand. Distinguish potential and real investment demand. Potential investment demand reflects the amount of income accumulated by economic entities, which can be directed to investment and constitutes potential investment capital. Real investment demand characterizes the actual need of economic entities for investment and represents investment resources that are directly intended for investment purposes - planned or intentional investments.
Investment demand is characterized by a high degree of mobility and is formed under the influence of a whole range of factors, among which one can conditionally single out macro- and microeconomic factors.
Macroeconomic factors affecting investment demand are as follows: national output; amount of savings; cash income population; distribution of received incomes for consumption and savings; expected rate of inflation; bid loan interest; tax policy of the state; financial market conditions; and others. An important macroeconomic indicator that affects investment demand is the volume of the national product produced. Its increase, ceteris paribus, leads to an increase in investment demand and vice versa (Fig. 3.a). Changes in the amount of savings and in the monetary incomes of the population act in the same direction. At the same time, it is not so much the absolute dimensions of these indicators that are of decisive importance, but the relative ones: the ratio between accumulation and consumption within the framework of the national product used, the distribution of income received for savings and consumption.
Savings under which market economy the part of income not used for consumption is understood as a source of investment resources. The amount of real resources for savings that the economy has at each specific stage of its development depends to a decisive extent on what priorities underlie the distribution of the produced product - current consumption or accumulation.
In turn, a change in the savings rate significantly affects shifts in the structure of the social product. When the savings rate falls, consumption rises and investment falls, resulting in capital outflows exceeding investment. This causes an imbalance in the economy. As savings decrease, the volumes of production, investment and consumption also decrease: there is a restoration of equilibrium at a different technological level.
An increase in the savings rate leads to another scenario of economic development, characterized by a fall in the level of consumption and an increase in the level of investment. The growth of investments after a certain time lag leads to the accumulation of capital in production, the level of accumulation and the level of investments increase until they reach the optimal value from the standpoint of economic stability. At the same time, as a result of the growth of savings, a higher level of consumption is ensured.
The experience of developed countries shows that those of them that, during the structural restructuring of the economy, directed a significant part of the created income of society to savings, channeling them into investments, reached high level average per capita income. A fairly close positive relationship is found between the share of the final product used for investment and the level of average per capita income.
A similar impact on the dynamics of investment is exerted by the distribution of household incomes for savings and consumption. The well-known position of J.M. Keynes on the growth of savings as income increases has not been confirmed by statistical studies in this area.
Investment growth is achieved with an increase in the share of savings in income received (Fig. 3. b)
At the same time, the role of savings as an investment resource largely depends on the influence of such factors as the growing preference for cash, the development of a system of institutional savings (insurance, social insurance), the bulk of which is not available to enterprises in need of capital, the increase in the importance of the state, which controls part of the loan.
The expected rate of inflation has a significant impact on investment demand (Fig. 3.c). In the most general sense an increase in inflation causes a depreciation of the income expected to be received from investments. In addition, inflation has a negative impact on the volume of investment in a number of ways: through the containment of driving forces economic growth in the long term, limiting the processes of accumulation and expansion of production, depreciation of production assets in all functional forms, inflationary taxation of profits, the transfer of funds from the sphere of production to the sphere of circulation, a decrease in real incomes and savings, a decrease in the capacity of the domestic market, etc. Therefore, the growth of inflation rates, as well as inflationary expectations, hinders the activation investment activity.
Rice. 3.in
In a developed market economy, the formation of investment demand is associated with the functioning of the financial market, which mediates the movement of investment capital, as well as income from invested assets. Accumulating the savings of individual investors, the financial and credit system forms the main channel of investment demand. Especially important role at the same time, banks play, which can use not only savings, but also circulating funds, emission. The conjuncture of the stock and credit market, determining the conditions of investment, affects the volume and structure of investments. Investment income taking on financial market the form of dividend and interest, reproduce the potential investment demand, which can be realized through reinvestment.
The interest and tax policy of the state has a significant impact on the dynamics of investments. Regulation of interest and tax rates is an important lever of state influence on investment demand. The reduction in income taxes, other things being equal, leads to an increase in the share of savings of enterprises directed to investment.
The interest rate determines the price of borrowed funds for investors. An increase in the interest rate increases the incentive to save and at the same time limits investment, making it unprofitable. With a decrease in the loan interest rate, investment turns out to be more profitable, therefore, a decrease in the loan interest rate leads to an increase in investment and vice versa (Fig. 3.d).
However, the reduction in the interest rate as a factor in activating investments has objective limits, since at a certain stage of the decline interest rate the preference of economic agents to keep money in a more liquid cash(the theory of liquidity by J.M. Keynes) and the diversion of funds into the sphere of speculation in securities is increasing. In this regard, there is a problem of determining the optimal level of the interest rate under the given conditions, since an excessive increase or decrease in the interest rate causes damage investment activity. Thus, the impact of the interest rate on investment demand is generally ambiguous. The results of a number of empirical studies show that the dependence of investment dynamics on changes in the rate of interest is not clearly expressed.
Determining the impact of the interest rate on the dynamics of investment demand will be incomplete without clarifying its relationship with the rate of expected profit. However, when accepting investment decisions a significant role is played not by the nominal, but by the real interest rate, since the inflation factor distorts the real benchmarks even without taking it into account when comparing the loan interest rate with the expected rate. net profit an incorrect result may be obtained.
Profit plays a dual role in investment activity; on the one hand, it can be considered as a source of investment financing, and on the other hand, as an investment goal. Studies related to solving complex problems of mathematical formalization of the level and dynamics of investment demand, identifying the main parameters that determine investment demand, indicate the existence of a certain relationship between profit and investment.
The rate of expected return is one of the factors affecting investment demand at the microeconomic level. They should also include the costs of making investments, expectations, changes in technology, etc.
The rate of expected net profit is of particular importance in the system of microeconomic factors. This is due to the fact that it is profit that is the motive for investing. Investors only invest when they expect the return on investment to be greater than the cost. Therefore, the higher the rate of expected net profit, the greater the investment demand (Fig. 3.e).
At the same time, effective investment will take place only if the rate of expected net profit exceeds the real interest rate, otherwise the attraction of borrowed funds loses economic sense. Comparison of the expected net profit rate with the loan interest rate is carried out by enterprises even when using their own funds. Profits will be invested in one's own firm if the return on investment is higher than the interest rate, otherwise it will be placed on the capital market.
Thus, the interest rate is a criterion for the effectiveness of investment. The efficiency of an investment project cannot fall below the loan interest rate. Being the basis for evaluating investment assets as objects of capital investment, the interest rate performs another important function: it is a means of “updating” all other income, acting as a method for evaluating each income over time.
The next factor affecting investment demand is the cost of making investments. This factor is taken into account when calculating the rate of expected net profit for each investment project. An increase in costs causes a decrease in the rate of expected net profit and vice versa (Fig. 2.3, e). At the same time, since a significant proportion of investments is long-term, the time factor is also taken into account. In general, the greater the amount of investment costs and the payback period, the lower the level of investment demand.
The volume of investment is also influenced by the expectations of entrepreneurs based on forecasts of future demand, sales volume, profitability. The return on investment will depend on the increase in these indicators, so the growth of optimistic expectations leads to an increase in investment demand.
The greatest return is associated with investments in innovative products that reduce production costs, improve product quality and the rate of expected net profit. Therefore, changes in technology are a factor that stimulates investment demand.
Thus, investment demand is formed under the influence of heterogeneous and multidirectional factors that determine its flexibility and dynamism.
The second in terms of share in total demand (planned total costs) is investment demand. Firms' investment demand (I) represents firms' intentions or plans to increase their capital and/or inventories.
The role of investment in the economy cannot be overestimated. Through investments, the achievements of scientific and technological progress are realized, changes in the structure of production, economic growth rates, and, consequently, the possibility of increasing consumption and increasing prosperity depend on them. It is the change in investment that causes major macroeconomic shifts.
When analyzing investments, it is necessary to distinguish between autonomous and derivative (induced) investments. Autonomous investments are investments that do not depend on the level of income (GNP); derivative investments are investments whose value depends on the value of GNP. This topic deals with autonomous investments, i.e. we will proceed from the fact that, unlike consumption, investment demand does not directly depend (or depends very weakly) on current income.
The main factors affecting investment demand are the expected rate of return (Np) and the level bank interest(i).
The purpose of investing is to make a profit in the future. Obviously, the higher the expected return, the greater the demand for investment. On the other hand, when making decisions on the advisability of investing capital, the investor takes into account alternative possibilities for its application. Having a certain amount money, the investor always decides for himself what is more profitable: to invest in the acquisition of, for example, equipment or to put money in a bank. Its solution will depend on the level of bank interest. The higher the percentage, the more attractive bank investments, and vice versa.
General demand on investment is the sum of all planned investments.
Investment is demanded as long as the rate of expected return is higher than the rate of interest. This dependence of investment demand on the level of bank interest is described by the investment demand curve (Fig. 3).
The investment demand curve slopes downward and reflects an inverse relationship between the expected rate of return, the interest rate, and the total amount of investment required.
In addition to the expected rate of return and the rate of interest, investment demand can be influenced by other factors that will shift the demand curve for investment. These factors include:
costs for the acquisition, operation and maintenance of buildings, structures, equipment, etc. The growth of these costs will reduce the rate of profit, and the demand curve for investment will shift to the left;
business taxes. High tax exemptions reduce the return on investments and their value. The investment demand curve shifts to the left. Tax cuts backfire;
changes in production technology. Scientific and technological advances serve as an important incentive for investment, increase the demand for investment and shift the demand curve for investment to the right;
producers' expectations regarding market conditions: demand for goods and services, price changes, etc. Optimistic expectations shift the investment demand curve to the right, pessimistic expectations to the left;
the general socio-economic situation in the country, the current phase of the cycle, the stability of legal norms, etc.
The second in terms of share in total demand (planned total costs) is investment demand.
Investment demand firms ( I) represents intentions, or plans firms to increase their capital and/or inventories.
The role of investment in the economy cannot be overestimated. Through investments, the achievements of scientific and technological progress are realized, changes in the structure of production, economic growth rates, and, consequently, the possibility of increasing consumption and increasing prosperity depend on them. It is the change in investment that causes major macroeconomic shifts.
The main source of investment is savings, which is easy to detect from the main macroeconomic identity:
E \u003d C + I + G + Xn
To simplify the analysis, let us consider the simplest circuit model for a closed economy, where there is no government sector, taxes, foreign economic relations, i.e. the last two components are excluded. Therefore, the total cost of GDP production will be equal:
E = C + I
In addition, it is known that income is the sum of consumption and savings (S):
Y=C+S
Equilibrium is achieved when the balance of total income and expenses. Equating them, we get:
C + I = C + S, or I=S, i.e.
investments are equal to savings (the last identity also applies to the main macroeconomic identities).
When analyzing investments, it is necessary to distinguish autonomous and induced(derivatives) investment.
Offline investment- this is an investment that is not caused by an increase in national income and is carried out with an unchanged demand for goods. They aim to introduce new technologies, improve production, reduce production costs.
The main sources of financing for investment activities are: own funds(depreciation, profit, various cash savings); borrowed funds(bank loans, etc.); means of the state budget and off-budget funds.
Induced Investment- these are investments, the amount of which depends on the amount of income (GNP) and aimed at the formation of new production capacity, the reason for the creation of which is an increase in demand for material goods and services. That is, these are investments that are generated by an increase in demand. When demand increases, additional output is produced by more intensive use of existing equipment. If the increased demand is not satisfied, then new production facilities are built to produce the missing products.
To determine the amount of investment induced by a steady increase in the demand for a good, it is necessary to know how many units of additional capital will be required to produce an additional unit of output.
The indicator that characterizes the ratio between capital growth and output growth is called accelerator or the coefficient of incremental capital intensity:
V = ∆K / ∆Y
If the value of the accelerator is known, then it is possible to determine how much investment is needed to increase production from the initial level Y 0 to the desired one, corresponding to increased demand Y1:
I \u003d V x (Y 1 - Y 0) \u003d V x ∆Y
The above formula shows that the induced investment is a function of the change in national income.
Investment costs include:
1) investment in fixed assets, which consist of the expenses of firms: for the purchase of equipment and for industrial construction (industrial buildings and structures);
2) investment in housing construction ( household spending on housing purchases);
3) investment in stocks(inventories include: stocks of raw materials and materials necessary to ensure the continuity of the production process; work in progress, which is associated with technology production process; stocks of finished (manufactured by the firm), but not yet sold products.
This topic deals with autonomous investments, i.e. we will proceed from the fact that, unlike consumption, investment demand does not directly depend (or depends very weakly) on current income.
The main factors affecting investment demand are the expected rate of return ( Np) and the level of bank interest ( i).
The purpose of investing is to make a profit in the future. Obviously, the higher the expected return, the greater the demand for investment.
On the other hand, when making decisions on the advisability of investing capital, the investor takes into account alternative possibilities for its application. Having a certain amount of money, the investor always decides for himself what is more profitable: to invest in the purchase of, for example, equipment or to put money in a bank. Its solution will depend on the level of bank interest. The higher the percentage, the more attractive bank investments, and vice versa.
The total demand for investment is the sum of all planned investments.
Let's analyze the following example. Suppose that there are three investment projects (Table 1).
Table 1. Data on the implementation of three projects
Assume further that the bank interest rate is 7%. In this case, all projects are profitable, since the expected rate of return in all projects is greater than the bank interest. The total demand for investments will amount to 450 million rubles. (100 + 150 + 200). If the interest rate is equal to 9%, then the third project will be unprofitable, and the demand for investments will be 250 million rubles. (100+150); if the interest rate is 11%, then only the first project will be profitable, and the demand will be equal to 100 million, and so on. Investment is demanded as long as the rate of expected return is higher than the rate of interest. This dependence of investment demand on the level of bank interest is described by the investment demand curve (Fig. 3).
Figure 3. Graph of investment demand
The investment demand curve slopes downward and reflects an inverse relationship between the expected rate of return, the interest rate, and the total amount of investment required.
In addition to the expected rate of return and the rate of interest, investment demand can be influenced by other factors that will shift the demand curve for investment. These factors include:
1) costs for the acquisition, operation and maintenance of buildings, structures, equipment, etc. The growth of these costs will reduce the rate of profit, and the demand curve for investment will shift to the left;
2) taxes on entrepreneurs. High tax exemptions reduce the return on investments and their value. The investment demand curve shifts to the left. Tax cuts backfire;
3) changes in production technology. Scientific and technological advances serve as an important incentive for investment, increase the demand for investment and shift the demand curve for investment to the right;
4) producers' expectations regarding market conditions: demand for goods and services, price changes, etc. Optimistic expectations shift the investment demand curve to the right, pessimistic expectations to the left;
5) the general socio-economic situation in the country, the current phase of the cycle, the stability of legal norms, etc.
The dynamics of savings and investment is regulated by the interest rate: if it increases, households begin to save relatively more and consume less. The growth of savings over time leads to a decrease in interest on loans, and this, in turn, ensures the growth of investments (Fig. 4).
At first glance, it might seem that what more population saves, the better it is: after all, savings are a source of investment. However, it is not. The nation that consumes more rather than saves is richer. This is the so-called frugality paradox» . Its essence lies in the fact that the desire of society to save more now leads to a decrease in the amount of savings in the future.
Rising savings means shrinking consumer spending which are part of aggregate demand. A fall in demand will lead to a decrease in GNP, income and, consequently, a decrease in savings in the future. However, it must be borne in mind that the paradox of thrift manifests itself only in conditions of incomplete use of resources, in conditions of full time an increase in savings can lead to lower prices.
 |
Figure 4. Dynamics of savings and investments
Growth of investments, increasing aggregate demand, leads to an increase in national output (GNP). At the same time, investment costs increase the volume of production by an amount greater than the investment itself. Here the so-called cartoon effect (multiplier effect) - the ability of expenses to cause an increase in income (GNP) greater than the expenses that caused this increase.
The essence of the multiplier effect can be explained by the following example.
Suppose an entrepreneur decides to invest 10,000 den. units to improve their production. As a result, suppliers building materials, equipment, workers employed in construction and installation, etc. work, received additional income, equal to 10,000 den.un. We assume that the marginal propensity to consume ( MRS) is constant and equal to 0.8. This means that suppliers, workers from the received income of 10,000 den. units spend 8,000 den. units on consumption, increasing someone's income by this amount. The second recipients of income will spend 6400 (0.8 x 8000) den.un., generating income of third parties at the level of 6400 den.un. etc. (Table 2).
Table 2. Multiplier effect
| Income | Consumption | Saving | |
| 10000 | 8000 | ||
| 8000 | 6400 | ||
| 6400 | 5120 | ||
| 5120 | 4096 | ||
| 3277 | |||
| Total |
Thus, the original 10,000 den. units triggered an endless chain of secondary consumer spending, multiplying total revenues by several times.
This expression is the sum of the members of a decreasing geometric progression, which is equal to: = 1: 0.2 = 5.
Hence: the initial expense of 10,000 den. units turned into an income amount equal to 10,000 x 5 = 50,000 den. units
Since 0.8 is the marginal propensity to consume ( MRS), then (1–0.8) is the marginal propensity to save ( MPS).
The coefficient characterizing the degree of change in income (GNP) as a result of a change in investment is called investment multiplier.
Investment multiplier (MR I) is the ratio of the change in the value of GNP to the investments that caused this change; is equal to the reciprocal of the marginal propensity to save:
MR I = 1: (1 - MPC) = 1: MPS
In our example, an investment equal to 10,000 den. units, led to an increase in GNP by 50,000 den. units
Thus, due to the multiplier effect, the increase in GNP as a result of an increase in investment will be greater than the investment itself:
∆GNP = I x MR I
However, it must be kept in mind that the multiplier works in both directions, and a decrease in investment will lead to a fall in GNP by an amount greater than a decrease in investment.
Investments provide an increase in the applied capital. At the same time, investments (costs) are made today, and the return on them (income) is received in the future. Therefore, to analyze the profitability of investments (possibility of generating income), it is necessary to bring income and expenses distributed over time to a single point in time.
Bringing income and expenses distributed over time to a single point in time is carried out in the process discounting .
The process of calculating the future value of funds invested today or determining today's value the means that we will receive in the future is called discounting .
Discounting is carried out according to the formula:
FV= PV(1+i) t ,
where PV- today's present value(money today);
FV– value in t years (money in t years);
i– discount rate (bank interest rate).
As a result of discounting, the current analogue of any amount of money that will be received through certain period at existing norm(rate) of interest.
It follows from this that the sum FV through t years is equivalent to owning the value PV today.
Respectively PV shows how much the future amount is worth FV now.
Comparison of the current cost (value) of future income with today's investment costs allows you to make a decision about their appropriateness.
The investment is worthwhile if net present value ( NPV ) - the difference between the expected profit, reduced to the current moment in time, and the investment (I) - more than 0.
For example, the company decides whether it is worth buying a machine worth 100 thousand rubles. Its service life is 3 years. The company plans to receive an annual income from the operation of the machine, equal to 45 thousand rubles. Is it worth buying a machine?
The present value of a series of payment flows received each year during the period t years is calculated from following formula:
, that is
where: FV 1 , FV 2 , … FV n- income that the economic agent expects to receive in each of the future periods (from the first to the nth) from investments;
i- the discount rate, which in macroeconomic models, as a rule, is assumed to be equal to the interest rate.
Based on the interest rate equal to 10%, the present value of the expected income will be: = 111.9 thousand rubles, then the net present value will be equal to: 111.9 - 100 = 11.9 thousand rubles. The investment is profitable.
However, if the interest rate is 20%, then the present value will be 94.8 thousand rubles, i.e., the net present value will be less than 0. This means that the acquisition of the machine is unprofitable.
Conclusions on question 2
Investment demand depends on the expected rate of return (direct relationship) and the level of bank interest (inverse relationship) and practically does not depend on the value of the current volume of national production (income).
Changes in investment lead to changes in GNP (income), b about greater than the amount of investment that caused these changes. The ability of spending to cause a greater change in income than the spending itself is called the multiplier effect.
The investment multiplier is equal to the reciprocal of the marginal savings rate. The increase in GNP caused by investment is equal to the amount of investment multiplied by the investment multiplier.
Conclusion
Lecture conclusions
The second in terms of share in total demand (planned total costs) is investment demand. Firms' investment demand (I) represents the intentions, or plans, of firms to increase their capital and/or inventories.
The role of investment in the economy cannot be overestimated. Through investments, the achievements of scientific and technological progress are realized, changes in the structure of production, economic growth rates, and, consequently, the possibility of increasing consumption and increasing prosperity depend on them. It is the change in investment that causes major macroeconomic shifts.
When analyzing investments, it is necessary to distinguish between autonomous and derivative (induced) investments. Autonomous investments are investments that do not depend on the level of income (GNP); derivatives are investments, the value of which depends on the value of GNP. This topic deals with autonomous investments.
So, we proceed from the fact that, unlike consumption, investment demand does not directly depend (or depends very weakly) on current income. The main factors influencing investment demand are the expected rate of return (Np) and the level of bank interest (i).
The purpose of investing is to make a profit in the future. Obviously, the higher the expected return, the greater the demand for investment. On the other hand, when making decisions on the advisability of investing capital, the investor takes into account alternative possibilities for its application. Having a certain amount of money, the investor always decides for himself what is more profitable: to invest in the purchase of, for example, equipment or to put money in a bank.
The total demand for investment is the sum of all investment decisions of firms.
Let's consider the following example. Suppose there are three investment projects.
Suppose further that the bank interest rate is 7%, then all projects are profitable to implement. The total demand for investments will amount to 450 million rubles. (100 + 150 + 200). If the interest rate is equal to 9%, then the demand for investments will be 250 million rubles. (100+150); if the interest rate is 11%, then the demand will be 100 million, and so on. Investment is demanded as long as the rate of expected return is higher than the rate of interest.
This dependence of investment demand on the level of bank interest is described by the investment demand curve (Fig. 21.3).
Rice. 21.3. investment demand schedule
The investment demand curve slopes downward and reflects an inverse relationship between the expected rate of return, the interest rate, and the total amount of investment required.
In addition to the expected rate of return and the rate of interest, investment demand can be influenced by other factors that will shift the demand curve for investment.
These factors include:
Costs for the acquisition, operation and maintenance of buildings, structures, equipment, etc. An increase in these costs will reduce the rate of profit, and the demand curve for investment will shift to the left;
Business taxes. High tax exemptions reduce the return on investments and their value. The investment demand curve shifts to the left. Tax cuts backfire;
Changes in production technologies. Scientific and technological advances provide an important incentive for investment;
Manufacturers' expectations regarding market conditions: demand for goods and services, price changes, etc. Optimistic expectations shift the investment demand curve to the right, pessimistic expectations to the left;
The general socio-economic situation in the country, the current phase of the cycle, the stability of legal norms, etc.
The growth of investment, increasing aggregate demand, leads to an increase in national output (GNP). At the same time, investment costs increase the volume of production by an amount greater than the investment itself. This is where the so-called multiplicative effect (multiplier effect) comes into play. As J. M. Keynes wrote, "... the multiplier principle allows us to give a general answer to the question of how fluctuations in investment, which make up a relatively small share of national income, can cause fluctuations in aggregate employment and income, which are characterized by a much larger amplitude."
The essence of the multiplicative effect can be explained by the following example.
Suppose an entrepreneur decides to invest 10,000 den. units to improve their production. As a result, suppliers of building materials, equipment, workers employed in construction and installation, etc. works, received additional income equal to 10,000 den. We will assume that the marginal propensity to consume (MPC) is constant and equal to 0.8. This means that suppliers, workers from the received income of 10,000 den. units spend 8,000 den. units on consumption, increasing someone's income by this amount. The second recipients of income will spend 6400 (0.8 x 8000) monetary units, generating third-party income at the level of 6400 monetary units. etc.
| Income | Consumption | Saving | |
| 10000 | 8000 [(0.8) x 10000] | 2000 | |
| 8000 | 6400 [(0.8) x 8000] | 1600 | |
| 6400 | 5120 [(0.8) x 6400] | 1280 | |
| 5120 | 4096 [(0.8) x 5120] | 1024 | |
| 4096 | 3277 [(0.8) x 4096] | 819 | |
| Total: | 50000 | 40000 | 10000 |
Thus, the original 10,000 den. units triggered an endless chain of secondary consumer spending, multiplying total revenues by several times.
This expression is the sum of the members of a decreasing geometric progression, which is equal to: = 1: 0.2 = 5. Hence, the initial expense of 10,000 den. units turned into an income amount equal to 10,000 x 5 \u003d 50,000 den. units
Since 0.8 is the marginal propensity to consume (MPS), then (1-0.8) is the marginal propensity to save (MPS). Therefore, the coefficient that increases income (GNP) as a result of investment, or investment multiplier (MR i), is equal to:
MR i = 1: (1-MPS) = 1: MPS.
For example, if investments amounted to 1500, MRS = 0.6, then GNP will increase by = = 1500 x 2.5 = 3750.
Thus, due to the multiplicative effect:
AGNP = I x MR i .
However, it must be kept in mind that the multiplier works in both directions, and a decrease in investment will lead to a fall in GNP by an amount greater than a decrease in investment.
Questions for self-examination
1. What is investment cost? What is the role of investment in the economy?
2. What determines the investment demand?
3. What factors shift the investment demand curve?
4. How does the increase in investment affect the volume of the gross national product?
4. What is the essence of the multiplicative effect? What is the investment multiplier?
6. What is the change in GNP due to investment?
Basic concepts and terms
Consumption function, autonomous consumption, savings function, average propensity to consume, average propensity to save, marginal propensity to consume, marginal propensity to save, autonomous and derivative investments, investment demand, multiplier effect, investment multiplier.
1. Consumption and savings are functions of income. As income rises, the share of consumption declines relatively, while the share of savings rises. Autonomous consumption is consumption independent of income level. The level of consumption and savings is characterized by the following indicators: average propensity to consume - the share of income directed to consumption in total income; average propensity to save - the share of income directed to savings in total income; marginal propensity to consume - the ratio of changes in consumption to changes in income; The marginal propensity to save is the ratio of the change in savings to the change in income.
2. Investment demand depends on the expected rate of return (direct relationship) and the level of bank interest (inverse relationship) and practically does not depend on the value of the current volume of national production (income). Changes in investment lead to changes in GNP (income) greater than investment. The ability of spending to cause a greater change in income than the spending itself is called the multiplier effect. The investment multiplier is equal to the reciprocal of the marginal savings rate. The increase in GNP caused by investment is equal to the amount of investment multiplied by the investment multiplier.
3.3. Demand for investment goods. Keynesian and neoclassical concepts of investment demand
Investments - long-term investments public or private capital in various sectors of the economy both domestically and abroad for the purpose of making a profit.
In macroeconomics, investment means real investment- investment of capital by a private firm or the state in the production of a particular product.
There are three types of investments:
1. Production investment(buildings, structures, equipment).
2. Investments in housing construction(acquisition of houses for living or renting out).
3. Investment in reserves(raw materials, materials, work in progress, finished products).
Distinguish gross and clean investments.
Gross (gross) investments is an investment to replace old equipment (depreciation) plus an increase in investment to expand production.
Net (net) investments- this is gross investment minus the amount of depreciation of fixed capital.
Investment demand comprises two parts.
1. From the demand for the restoration of depreciated capital.
2. From the demand for an increase in net real capital.
Investment demand- this is the most dynamic and volatile component of aggregate demand, it depends on objective factors (the state of the economic situation: the expected rate of net profit, the interest rate) and the subjective factor (decisions of entrepreneurs).
Investment demand curve shows in graphical form the amount of investment that is possible at each given level of interest rate.
From fig. 3.7 shows that there is an inverse relationship between the interest rate and the total amount of required investment.
In addition to the interest rate, investment is affected by increases in GNP, changes in tax rates, technological changes, and entrepreneurial expectations. In this case, there is a change in the demand for investment. Any factor that causes an increase in the expected return on investment shifts the investment demand curve to the right, and causing a shift in the expected return shifts the curve to the left.
Actual investments are planned and unplanned (unforeseen changes in inventory) investments.
Depending on the factors that determine the volume of demand for investments, they are divided into autonomous, i.e., not caused by an increase in aggregate demand (national income), and induced, caused by the growth of aggregate demand (national income).
The impact of investment on aggregate demand (national income) is reflected in the theory of the multiplier and accelerator.
The multiplier theory arose during the Great Depression of 1929–1933. in relation to a society which is in the conditions of the most acute crisis.
cartoonist shows the role of investment in the growth of national income and employment. The action of the multiplier can be written as a chain: I, => N, => Y, => C, i.e., as investment increases, employment increases, followed by income and consumption.
Thus, between the change in autonomous investment and national income there is a stable relationship.
The investment multiplier is a numerical coefficient showing the dependence of a change in income on a change in autonomous investment. If there is an increase in investment (for example, an increase in government spending on public works in a recession), then income will increase by an amount that, in M times more than the increase in investment, i.e.
∆Y =M I x ∆ I
where ∆ Y- increase in income; ∆ I– increment of investments; M is a multiplier (multiplier), therefore
Since the multiplier is directly related to the marginal propensity to consume (MRS) and inversely with the marginal propensity to save (MPS) then
The static model of the multiplier was proposed in 1931 by R. F. Kahn and developed in detail by J. M. Keynes.
The dynamic model of the multiplier, taking into account the time factor, was studied in detail by P. Samuelson, F. Makloop, J. Robinson, A. Hansen and others.
Later, economists came to the conclusion that the multiplier effect can be caused by endogenous (internal) factors. This was confirmed by: the multiplier of consumption, credit, banking, deposit and tax.
The accelerator model (induced investment) was proposed by J. Clark.
Accelerator is the ratio of an increase in investment to the relative increase in income, consumer demand, or finished products and is expressed by the formula:
where ∆ I– investments; ∆ Y- income; t- time.
The accelerator reflects the ratio of the increase in output (income, demand) of only “induced” investments, i.e., to new capital formed as a result of an increase in the level of consumer spending. The principle of acceleration is that an increase or decrease in consumer spending causes changes in capital accumulation. An increase in consumer demand for goods causes an increase in production capacity. Decrease in consumer spending can reduce profits, which will cause a decrease in investment.
In macroeconomic models, the accelerator is combined with a multiplier (multiplier), which is widely used to regulate the economy abroad.
Keynesian concept of demand for investment
The Keynesian theory of demand for investment is based on the concept introduced by J. M. Keynes "marginal efficiency of capital".
It is called the limit because we are talking about the capital that is added to the existing one.
When deciding whether to invest, entrepreneurs compare the expected net income stream from investment projects With investment costs. The difficulty lies in assessing the time aspect, since the main costs are usually incurred in the first years, and the income from them is distributed over subsequent years. When investing in investment projects, an entrepreneur must take into account the potential interest on invested funds and the degree of risk.
Entrepreneurs evaluate the net income stream from investment projects using discounting. Possibility of receiving some amount through t years can be determined by dividing this amount by (1 + R) n , where R- discount rate. An investment project will be economically viable if
where K 0 - required investments in the investment project; P 1, P 2,…, P p - streams net income from the project at time 1, 2,…, P; R- discount rate.
The value of the discount rate that turns a given inequality into equality is called the marginal efficiency of capital. (R*). Investment demand is associated with the selection of investment projects according to the criterion of profitability. Investors, choosing between investment projects, will stop at those projects that have R* the tallest.
R* falls with an increase in investment, because as investment grows, their expected return. This is because the most promising and profitable projects are invested first, and further investment is less productive. This process is shown in Fig. 3.8.
Entrepreneurs take into account not only the return on investment, but also degree of risk each of them. Investment spending should only be increased if the rate of return is greater than a percentage of savings. The interest rate is not only a monetary phenomenon, but also a psychological one. the most important factor influencing the motivations of investors; it is the reward for not keeping wealth in monetary form. Since the most reliable investment option is to buy government bonds, the interest rate on them is considered as the lower limit R*.
Investments will be made if R* > i.
From fig. 3.8 shows that at the rate of interest i 3 expedient investments in the amount of 0 X, at the rate of interest i 2 - in size 0 Y, and at the rate of interest i- investment costs will increase to 0 Z.
The volume of investment demand will be the higher, the lower the current interest rate. Therefore, investment demand can be represented as a decreasing function of the interest rate:
I a \u003d I (R * - i),
where I- marginal propensity to invest.
marginal propensity to invest ( I i) shows how many units the investment will increase if the interest rate falls by one point. If a i↓, This will increase the marginal propensity to invest.
Among foreign economists there is no unanimity in views on the sensitivity of investments in relation to changes in the interest rate. Keynes and his followers believe that the amount of investment depends to a greater extent on R*, than the rate of interest.
The marginal efficiency of capital is a category of economic forecasting exante, since the calculation is based not on the actual, but on the expected profitability of investment projects, through R*."The foreseen future influences the present"; it is not an estimate, not a specific rate of interest; this is internal norm profitability.
On value R* influenced by subjective factors: pessimism and optimism of investors.
Neoclassical theory of investment demand
According to the neoclassical concept, entrepreneurs invest in order to achieve optimal size capital. Therefore, the function of investment demand can be represented as:
I a = β(K* – K t); 0< β < 1 ,
where I a is the volume of autonomous investments for the period t;K t the actual amount of capital; TO* - optimal amount of capital; p is a coefficient characterizing the degree of approximation of the existing capital to the optimal one for the period t.
Determination of the optimal amount of capital
1. The optimal amount of capital provides maximum profit with the existing technology.
2. Under conditions of perfect competition, profit is maximum when the marginal productivity of capital ( r) is equal to the marginal cost, which consists of the depreciation rate (d) and interest rates on financial assets (i), which represent the opportunity cost of using funds as capital.
Profit is maximum if r=d+i.
To determine the optimal amount of capital, we use the Cobb-Douglas production function:
Y= K a x L l - a; 0< a <1,
where a - parameter by which the contribution of capital to output is determined.
Using the profit maximization condition, the optimal value of capital will be equal to:
If, at a given value of marginal cost, the production technology changes, then the value TO* will also change. If technological progress increases the marginal productivity of capital, then TO* will also increase (at a constant interest rate).
In this way, investment demand there is an increasing function of the marginal productivity of capital and a decreasing function of the interest rate (for a given value of depreciation).
The neoclassical investment function is more objective than the Keynesian one, since it is determined by the technology of production, in contrast to the Keynesian one, which depends on R*, ratio of optimism and pessimism of investors. The Keynesian investment function has less interest rate elasticity than the neoclassical one.
3.4. Aggregate supply in the short and long run
Aggregate supply (AS) - this is the total amount of final goods and services that can be offered (produced) in the economy at different price levels.
The dependence of the volume of supply on the average price level in the country shows curve AS.
On the nature of the curve AS affect:
price factors;
non-price factors.
The former change the volume of aggregate supply (moving along crooked AS). The second (changes in technology, resource prices, the amount of resources used, taxation of firms, market structure, etc.) lead to shift crooked AS.
Curve AS happens static and dynamic.
In contrast to the static dynamic curve AS used to estimate the rate of inflation on the change in national output.
Curve shape AS interpreted differently by the classics and Keynesians. Thus, the change in the value of the aggregate supply under the influence of the same factor may not be the same, which is due to which period (short or long) is taken into account.
classic model looks at the economy in the long run.
Long term is the period during which the prices of resources have time to adjust to the prices of goods so that the economy maintains full employment.
Long term curve AS reflects the country's production capabilities and is built on the basis of the following conditions:
The volume of production is determined only by the number of factors of production and the available technology and is not determined by the level of prices;
Changes in factors of production and technology are slow;
The economy operates at full employment of factors of production and, therefore, the volume of production is equal to potential;
Prices and nominal wages are flexible, and their changes maintain equilibrium in the markets.
Under these conditions curve AS vertical. It characterizes the natural (potential) level of output (Fig. 3.9), i.e., the volume of production in conditions of full employment, in which the resources of the economy are fully used, and unemployment is at the natural level. Fluctuations in aggregate demand (Fig. 3.10) change the price level. For example, when the money supply decreases, the curve AD 1 shifts to the left to AD2. The economic equilibrium shifts from the point E 1 exactly E 2, however, the amount of production AS remains at the same level.
Shifts in the aggregate supply curve in the long run are possible only with a change in the value of factors of production and technology.
In the short term, this model is unacceptable.
Keynesian model describes the economy in the short run and is based on the following assumptions:
Underemployment in the economy;
Commodity prices and nominal wages are rigid.
Under these conditions, the aggregate supply curve is horizontal (Figure 3.11). Fluctuations in aggregate demand affect the volume of production, the price level does not change. For example, a decrease in the money supply shifts AD 1 into position AD 2.Economic equilibrium shifts from the point E 1 exactly E 2 . Production volume - from the point Y 1 exactly Y 2 (Fig. 3.12).
Modern concepts explain the difference in the short-term curve AS from long-term market imperfections, i.e. price inflexibility and imperfect information. Curve AS in the short term shows that the output deviates from its natural (potential) value if the price level deviates from the expected one (Fig. 3.13) and is described by the equation:
Y=Y*+ a(P – P e),
where Y– actual release; Y* - natural (potential) value of output; R- price level; R e - expected price level; a - a coefficient that characterizes the intensity of the reaction of entrepreneurs to the deviation of actual prices from expected ones.
At the point E prices for resources and goods are balanced.
The short run aggregate supply curve has three sections: horizontal (Keynesian)(I), intermediate (ascending)(II) vertical (classical)(III), which are presented in fig. 3.14.
3.5. Interaction of aggregate demand and aggregate supply. Model AD-AS
The economic system is in equilibrium at the point of intersection of the curves AD and AS.
Intersection of the short-term curve AS with curve AD indicates that the economy is in short-run equilibrium.
The economic system is in a state of long-term equilibrium only at the point of intersection of the curve AD and long-term curve AS. The condition for long-term and short-term equilibrium is the intersection of three curves. Let this be the point E 0(Fig. 3.15). Dot E 0 indicates the original long-run equilibrium.
Suppose the central bank increased the money supply.
In this case, there will be a shift AD from AD 1 before AD2, consequently, prices will settle at a higher level, the economic system will be in a state of short-term equilibrium at the point E 1 . At the point E 1 real output will exceed the natural level, prices will rise, and unemployment will fall below the natural level.
The expected level of prices for resources will rise, which will cause an increase in costs and a decrease in AS 1 before AS 2 . Then the short run curve AS 1 move into position AS 2 and the economic system will move up and to the left along the curve AD2. At the point E 2 a short-term equilibrium is established.
A new state of economic equilibrium will be established at the point E 3, in which output will fall and the unemployment rate will rise (each up to its natural rate). Thus, the economic system will return to its original state, but at an increased price level.
Chapter 4. The money market and the securities market
4.1. Money: concept, functions, money supply and its measurement
In the economic literature there are several definitions of the concept of money. We highlight the following:
Type of financial assets that can be used for transactions;
A special commodity that performs the role of a universal equivalent in the exchange of goods;
An important macroeconomic category, through which the analysis of inflationary processes, cyclical fluctuations, the mechanism for achieving an equilibrium state in the economy, the coherence of the functioning of the commodity and money markets is carried out;
A specific type of property that does not generate income at a stable price level.
The most characteristic feature of money is its high liquidity.
Money arose spontaneously as a result of the long development of the exchange of goods and services. The role of money as a universal equivalent was played by various goods: fur, livestock, salt, timber, tobacco, fish, shells, cocoa grains, etc. With the development of exchange, the role of money passed to metals - gold and silver, which, by their properties, are the most were suitable for performing the functions of money: high cost, non-spoilage, transportability.
Modern economic literature considers three main functions of money: means of circulation, measure of value, means of accumulation or savings.
The amount of money in circulation is controlled by the state through monetary policy. In practice, this function is performed by the central bank. Distinguish internal and external money. Domestic money is money created by commercial banks. Foreign money is money issued by the central bank.
Money allows you to save transaction costs of market interactions both in the process of choosing the assortment, the volume of goods and services purchased, the time and place of transactions and counterparties in the transaction, and in measuring the cost of goods and services. Suppose there is a barter economy. In this case, for example, a historian, in order to get a haircut, must find a barber who would like to listen to a lecture on the Hundred Years' War (1337–1453) between England and France. It is not difficult to imagine how great the costs would be to search for a pair match of the desires of potential counterparties. If, however, there is agreement in society on a universal equivalent, then it is not difficult to find exchange proportions. Another thing in the barter economy. To find exchange proportions, it is necessary to find a large number of possible combinations of goods.
The control of the state over the amount of money in the country is carried out by the central bank. Since control over the amount of money is important for economic stability, there is a need for measuring the money supply.
Depending on the degree of liquidity, a set of indicators (aggregates) is used to measure the money supply circulating in the country at the moment. The principle of aggregation is that subsequent amounts are added to the existing money supply. The composition and number of monetary aggregates used vary by country.
For example, the Central Bank of the Russian Federation (CBRF) allocates four monetary aggregate - MO, Ml, M2, MZ, corresponding to four (different from the point of view of the Central Bank of Russia) degrees of liquidity of its components:
М0- cash in circulation;
Ml - M0 plus deposits of the population in savings banks on demand, deposits of the population and enterprises in commercial banks on demand, funds of the population and enterprises on settlement and current accounts;
M2-ML plus term deposits in savings banks;
MZ - M2 plus bank certificates of deposit, government bonds.
In countries with developed market relations, the aggregate is used L - M 3 plus Treasury savings bonds, short-term government bonds, commercial paper, etc.
In macroeconomic analysis, aggregates are most often used ml and M2.
Real money, or money in the narrow sense of the word, in macroeconomics is an aggregate M1. Other units ( M2, M3, L) characterized as "quasi-money" or "almost money". Aggregates ml and MZ contain additional varieties of financial assets that correspond more to the function of a store of value than the function of a medium of exchange: state short-term obligations (GKO), federal loan bonds (OFZ), bonds of the state internal currency loan (OGVVZ), government savings loan bonds.
The dynamics of monetary aggregates is due to a number of reasons, including movements in the interest rate. For example, when the interest rate increases, the aggregates M2 and MOH can outrun ml, since their components generate income in the form of interest.
On the money market interest rate(nominal, real) acts as an alternative cost of money and characterizes the lost income associated with the storage of savings in cash.
Nominal interest rate reflects bank interest, and real- Purchasing power depending on the level of inflation.
The relationship between nominal and real interest rates is described Fisher equation:
i = r + π,
where i- the nominal rate of interest; r- real interest rate; π- inflation rate.
The equation shows that the nominal interest rate can change on two reasons:
Due to changes in the real interest rate;
Because of the rate of inflation.
For example, if an entity has deposited an amount of money into a bank account that yields 10% per annum, then the nominal rate will be 10%. With an inflation rate of 6%, the real rate will be only 4%.
The price of money is formed in the money market as a result of the supply and demand for money.
Output and employment deviate from their natural levels as a result of shocks - sharp changes in AD (sharp fluctuations in consumer and investment demand; changes in the money supply, etc.) and supply shocks (a sharp rise in oil prices, natural disasters, etc.). ).
