Briefly discuss about the determinants of investment

Investment: Investment means an addition to the nation’s physical stock of capital link the building of new factories, new machines as well as any addition to the stock of finished goods or the goods in the pipeline of production.

In economics investment means the new expenditure incurred an addition of capital such as machines, buildings, equipments, tools etc.

Determinants of investment: Investment depends upon some factors which are given below -

(i) Rate of interest: We often hear reports that low interest rate have stimulated how the construction or that high rates have reduce it. Such reports imply a negative relationship between interest rates and investment in residential sectors. This relationship applies to all forms of investment, higher interest rates tend to reduce the quantity of investment, while lower interest rate increase it.

(ii) Expectation: A change in the capital stocks changes future production capacity. As expectations change in a way that increase the expected return from investment, the investment will increase. Similarly expectations of reduce profitably the investment will reduce.

(iii) The level of economic activity: Firms need capital to produce goods and services. An increase in the level of production is likely to boost demand for capital and thus lead to greater investment. Therefore, an increase in GDP is likely to shift the investment demand curve to the right.

(iv) The cost of capital goods: If the cost of capital goods increases then the investment will decrease. For example, if the construction cost of new buildings raises then the quantity of investments at any interest rate is likely to fall.

(v) Technological change: The implementation of new technology often requires new capital changes in technology increase the demand for capital. For example, the development of fiber optic technology for transmitting signal has stimulated huge investment by telephone and cable television companies on the other hand advances in computer technology have encourage massive investments in computer.