AGGREGATE INVESTMENT

EXPENDITURE

Speakers:
Princess Aduana
Eherson Cherwin Otoc

 Investment is the amount of expenditure

towards the capital goods (ie. plant and
machinery, also 'human capital' - training and
education), which are intended to increase
productivity, efficiency and output of goods and
services.
Investment refers to the expenditure towards
goods that are expected to yield a return or
increase their own value over time.
In national accounting terms, stocks, bonds,
mutual funds, and other items whose value is
risky, are NOT investments. They fall into the
savings account, not the investment account.

Investment Expenditures
Expenditures by the business
sector on final goods and services,
in particular, capital goods like
factories and equipment,
undertaken in a given time period.

Aggregate Expenditure (AE)

formula:
AE = C+Ip+G+Xn
Where:
C = Household Consumption
Ip = Planned Investment
G = Government spending
Xn = Net exports (Exports-Imports)

Planned Investment
This refers to the expenditure a company
plans to spend in the coming year on
inventory and capital goods.
*Note:
-Inventory Investment
-Capital Goods

InventoryInvestment

- Inventory investment includes both

raw materials and finished items.
- Change in the stock of inventories
held at business.
It is positive when inventories are
increasing, and negative when
inventories are decreasing.

Capital Goods
Capital goods are business purchases
- distinguished from consumer goodssuch as new company trucks or
manufacturing equipment.

Planned Investment
Formula:
Iu = Ip Ia
Or

Ip = Ia + Iu
Where:
I = Investment
Iu = Unplanned Investment
Ia = Actual Investment

Unplanned Investment:
Investment expenditures that the
business sector undertakes apart from
those they intend to undertake based on
expected economic conditions, interest
rates, sales, and profitability. This can be
either positive (unintended inventory
accumulation; you produced too much)
or negative (unintended inventory
decumulation; you produced too little
and had to run down your inventories)

Actual Investment:
Investment expenditures that
the business sector actual
undertakes during a given
time period, including both
planned investment and any
unplanned inventory
changes.

Planned Investment
Formula:
Iu = Ip Ia
Or

Ip = Ia + Iu
Where:
I = Investment
Iu = Unplanned Investment
Ia = Actual Investment

Iu = Ip Ia
= 50 cars 30 cars
= 20 cars unsold

Macroeconomic Equilibrium:
Actual Investment =
Planned Investment

Determinants of Investment:
1. Expectations of Future Profitability:
Optimism or pessimism of firms about the
economy is an important determinant of
investment
spending.
2. Interest Rate: Borrowing takes the
form of issuing corporate bonds or
receiving loans from banks. A higher real
interest rate results in less investment
spending, and a lower real interest rate
results in more investment.

3. Taxes: Firms focus on the profits

that remain after paying taxes.
Investment tax incentives provide
firms with tax reductions to increase
their spending on new investment
goods.
4. Cash flow: The difference between
the cash revenues received by a firm
and the cash spending by the firm.
The greater its cash flow and the
greater
its
ability
to
finance
investment.