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Macroeconomic Analysis 2003

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

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Macroeconomic Analysis 2003

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  1. Macroeconomic Analysis 2003 Investment Blanchard 16.2, Mankiw 17; M&S 14 Lecture 13

  2. 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

  3. Investment is More Volatile than Output: Why? Lecture 13

  4. Lecture 13

  5. Asset Market Bubbles and Collapse BEAR BULL Lecture 13

  6. Lecture 13

  7. Why Investment is the Most Volatile Component of the GDP? Lecture 13

  8. Investment Decision Analysis =0.08 Lecture 13

  9. 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

  10. Low interest rate induces producers to substitute out labour by capital o Lecture 13

  11. Optimal Capital Stock for a Firm C = (r+)K MPK Output Y = f(K) Y MPK=MC Kopt Capital Lecture 13

  12. 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

  13. Impact of Technological Advancement in the Capital Stock MPK2 MPK1 r-cost K1 K2 0 Lecture 13

  14. Lending is Growing with Lower Interest Rate in Recent Years Lecture 13

  15. Marginal Productivity Theory of Investment -calculations Lecture 13

  16. Marginal Productivity and the User Cost of Capital Lecture 13

  17. Role of Investment Tax Credit in Promoting Investment Why Manufacturers Lobby for a Tax Credit? MPK 0 K1 K2 Lecture 13

  18. What is the optimal capital stock for a car company? Lecture 13

  19. Optimal Capital Stock for the Car Company Lecture 13

  20. Problem of the Manufacturing Sector in the UK Lecture 13

  21. Input Prices are Volatile Because of the Volatility of Oil Prices Lecture 13

  22. Investment is sensitive to the Long-term Yield than to Short Term Returns Lecture 13

  23. Multiplier Accelerator Theory of Investment Lecture 13

  24. 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

  25. A Simple Illustration of the Multiplier Accelerator Theory of Investment Lecture 13

  26. Tobin’s q-theory and Investment Lecture 13

  27. 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

  28. 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

  29. 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

  30. 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

  31. Lecture 13

  32. Investment Income Distribution and Factor Substitution Lecture 13

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