Macroeconomic Analysis 2003
This presentation is the property of its rightful owner.
Sponsored Links
1 / 32

Macroeconomic Analysis 2003 PowerPoint PPT Presentation


  • 50 Views
  • Uploaded on
  • Presentation posted in: General

Macroeconomic Analysis 2003. Investment. Blanchard 16.2, Mankiw 17; M&S 14. Contents. Why investment is so volatile? Investment Decision: Present value and Cost Marginal productivity theory of investment A Numerical Example of Investment Problem

Download Presentation

Macroeconomic Analysis 2003

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Lecture 13 1262919

Macroeconomic Analysis 2003

Investment

Blanchard 16.2, Mankiw 17; M&S 14

Lecture 13


Contents

Contents

  • Why investment is so volatile?

  • Investment Decision: Present value and Cost

  • Marginal productivity theory of investment

  • A Numerical Example of Investment Problem

  • Investment tax credit and optimal capital stock

  • Problem of Manufacturing sector in UK

  • Long term yield and investment

  • Multiplier-Accelerator theory of Investment

  • Marginal productivity, Cost of Capital and Tobin’s Q

  • Exercises

Lecture 13


Lecture 13 1262919

Investment is More Volatile than Output: Why?

Lecture 13


Lecture 13 1262919

Lecture 13


Lecture 13 1262919

Asset Market Bubbles and Collapse

BEAR

BULL

Lecture 13


Lecture 13 1262919

Lecture 13


Lecture 13 1262919

Why Investment is the Most Volatile Component of the GDP?

Lecture 13


Lecture 13 1262919

Investment Decision Analysis

=0.08

Lecture 13


Lecture 13 1262919

Financing of an Investment Project

Need for Capital

Demand

for output

Financing an

Investment

Project

Self

Finance

Bequests

Bonds:

Debt Finance

Banks, Building

Society, Insurance

Equity Finance

Stock Market

(LSE)

Maturity

Instalment

Method

Repayment

Method

No

Risk

Risk

High

Risk

Lecture 13


Lecture 13 1262919

Low interest rate induces

producers to substitute out

labour by capital

o

Lecture 13


Lecture 13 1262919

Optimal Capital Stock for a Firm

C = (r+)K

MPK

Output

Y = f(K)

Y

MPK=MC

Kopt

Capital

Lecture 13


Lecture 13 1262919

Impact of Increase in the Interest rate on

the Optimal Capital Stock for a Firm

MPKb

Ra = (r2+)K

Rb = (r1+)K

MPKa

Output

&

Cost

Y = f(K)

Yb

r2 > r1

Ya

Ka

Kb

Capital

Lecture 13


Lecture 13 1262919

Impact of Technological Advancement in the Capital Stock

MPK2

MPK1

r-cost

K1

K2

0

Lecture 13


Lecture 13 1262919

Lending is Growing with Lower Interest Rate in Recent Years

Lecture 13


Lecture 13 1262919

Marginal Productivity Theory of Investment -calculations

Lecture 13


Lecture 13 1262919

Marginal Productivity and the User Cost of Capital

Lecture 13


Lecture 13 1262919

Role of Investment Tax Credit in Promoting Investment

Why Manufacturers Lobby for a Tax Credit?

MPK

0

K1

K2

Lecture 13


Lecture 13 1262919

What is the optimal capital stock for a car company?

Lecture 13


Lecture 13 1262919

Optimal Capital Stock for the Car Company

Lecture 13


Lecture 13 1262919

Problem of the Manufacturing Sector in the UK

Lecture 13


Lecture 13 1262919

Input Prices are Volatile Because of the Volatility of Oil Prices

Lecture 13


Lecture 13 1262919

Investment is sensitive to the Long-term Yield than to Short Term Returns

Lecture 13


Lecture 13 1262919

Multiplier Accelerator Theory of Investment

Lecture 13


Essence of the multiplier accelerator theory of investment

Essence of the Multiplier-Accelerator Theory of Investment

  • Change in demand requires change in Capital stock

  • New Investment meets this requirement

  • Investment has multiplier effect on income

  • There is more demand

  • More demand for capital stock

  • More investment and more output

  • This process continues, until the economy reaches turning point

  • There is a similar downward movement in output, investment and capital stock in the recessionary period.

Lecture 13


Lecture 13 1262919

A Simple Illustration of the Multiplier Accelerator

Theory of Investment

Lecture 13


Lecture 13 1262919

Tobin’s q-theory and Investment

Lecture 13


Exercises

Exercises

  • Optimal investment with a given production function and user cost of capital

  • Impact of investment tax credit

  • Whether to take or not take an investment project with a stream of projected revenues and certain cost

  • How to deal with uncertainties?

Lecture 13


Lecture 13 1262919

Link Between Financial System and the Economy

Y= F(K,L)

C

T

S

Funds

K

FA

Deposit

Banks

Pension Funds

Treasury

Bonds

Profit

Equity

Lecture 13


Lecture 13 1262919

Three Sources of Financing an Investment Project

  • Self-financing

    • Depends on retained earning

    • Personal savings

  • Bonds

    • Banks, Building Societies and Trusts

    • Various maturities and risks

  • Stocks

    • Market signals and equity prices

Lecture 13


Lecture 13 1262919

Savers

Households, Corporations and Government

S =100

Transaction Charges

(1-θ)S=0.05*100 = 5

Intermediaries

Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets

Investors

Small, Medium and Large

Private, Public, Domestic and Foreign

θS=I =95

Lecture 13


Lecture 13 1262919

Lecture 13


Lecture 13 1262919

Investment Income Distribution and Factor Substitution

Lecture 13


  • Login