Investment in macroeconomics

Investments - financial resources aimed at investing private firms or state capital in production, the goal - to make a profit. Distinguish: 1) real investment -investing capital in manufacturing industries for profit, production assets (equipment, etc.) are necessary; 2) economic investment - any investment in real assets + financial investments (asset portfolios) - associated with the purchase of securities.

Keynes in theory considers only real assets! Financial investment does not imply the mandatory creation of production capacity, it means a simple transfer of investor’s rights to money, and in return receives property - a security.

Investments are internal and external. Domestic investment relies on household savings. External are direct (investments are directly invested in production) and portfolio (shares of enterprises are bought, this is an investment in a portfolio (set) of securities that generate income). In addition, according to the degree of risk, there are absolute and relative investments.

Depending on the period in which funds are invested, investments are divided into short-term (up to 1 year) and long-term (over 1 year). Depending on the owner of the invested values, investments are public and private. State in turn are divided in accordance with the forms of implementation on:

• -    direct (directly allocated from the state budget);

• -    hidden (appearing as a result of tax policy).

The real interest rate and the expected rate of return can be attributed to the main factors affecting the amount of investment. Changing these factors graphically means moving along the investment demand curve (up - down). Among the factors affecting the dynamics of investment (shifting the investment demand curve to the right and left), we can distinguish the following:

• •    Expected demand for products

• •    Business taxes

• •    Changes in production technology

• •    Dynamics of comprehensive income

• •    Inflationary expectations

• •    Government policy

Gross investments are cash or cash equivalent funds that are available to the company. Gross investments are used to increase the share capital and stocks of an enterprise.

Net investment is gross investment minus depreciation. Depreciation charges - this is an indicator of depreciation of fixed assets of the enterprise, which includes buildings and structures, technological equipment, transport, and so on.

Investment Demand Functions. Investment demand is the need of the national economy to upgrade the fixed capital at a higher technological level and change the production structure.

Investment demand from the enterprise is the main factor in the demand for borrowed funds. The firm, in order to make a profit, must optimize a combination of factors, must offset the costs and get additional profit. The incentive to invest is a non-optimal combination of factors of production, therefore, the possibility of obtaining additional profits, increasing production and improving product quality. The company must calculate the return on investment:

Yield I = (Profit increase - Volume of invested funds) / (Volume of invested funds)

Yield I depends on the type of activity, firm size and the law of diminishing marginal productivity of factors of production (with an increase in the use of any production factor (with the others remaining unchanged) sooner or later a point is reached at which the additional use of the variable factor leads to a decrease in the relative and further absolute production volumes).

Yield decreases with volume due to law.

Based on this approach, investment demand is determined.

There are 3 sources of financing from the company:

• 1)    own funds

• 2)    borrowed funds (direct borrowing from the bank at interest)

• 3)    borrowing in the stock market.

All sources are related to the interest rate.

Each firm, when making investment decisions, compares the profit that investments will bring to the level of interest on deposits and invest if the profit is greater than the interest rate. This leads to the fact that the investment function is negative with respect to the interest rate.

Investment function

Investment function: I = I0 + MPI * Y, where I0 is an autonomous investment that does not depend on income.

MPI - marginal propensity to invest.

The investment demand function reflects the inverse relationship between the interest rate and the level of total investment (I):

I = e-dxR, where e is the maximum value of the investment d - coefficient determining the angle of the investment demand function, R is the real value of the interest rate.

The macroeconomic equilibrium of a commodity market is based on the interaction of its two main components - investment demand and supply savings. Demand for investments is made by entrepreneurs, and savings are offered by the population, in general they do not match. Producers, shaping investment demand, are guided by expected earnings in the future. Owners of cash income, based on their value in the present, extend their funds to current consumption and savings. For the macroeconomic equilibrium of the commodity market, it is necessary that the investment demand presented by entrepreneurs be fully satisfied with the estimated savings: I (r) = S (y)

We know that one of the forms of macroeconomic equilibrium is the equality of aggregate demand and aggregate supply (AD = AS). Taking into account consumer spending and investment demand, aggregate demand (AD) is equal to the sum: C + I. The volume of aggregate supply (AS) is then equal to national income (Y), which is used for consumption and saving C (Y) + S (Y). As a result, we obtain the following equality:

AD = AS = C (Y) + I (i) = C (Y) + S (Y), or I (i) = S (Y).

The equilibrium condition in the Keynesian model allows for a multiplicity of equilibrium states in commodity markets. To determine this set, the investmentsavings model (IS-model) is used.

The starting point for building an investment-savings model is the following thesis: since investments depend on the interest rate (interest rate) and savings depend on income, it is clear that there is a functional relationship between the interest rate and income, provided that investment and savings are equal. IS -model allows you to establish this connection.

To build an IS model, the plane is subdivided into four squares, each of which contains interrelated graphs, and the values of all variables — i.I.S.Y. (notebook)

I square - the IS curve is constructed by points, expressing the desired dependence Y (i), i.e. As parameters (on axes) income (Y) and interest rate (i) are considered.

• II    square - an investment demand curve is built, i.e. investment function I (i), where the parameters (on the axes) are investment (I) and the percentage rate (i).

• III    square - reflects the dependence I = S with the parameters of investment and savings (line I = S

held at an angle of 45 degrees, i.e. divides the coordinate angle exactly in half).

• IV    square - shows the function S (Y), i.e. The parameters are savings and income.

The general scheme for constructing the points of the IS curve is as follows. Suppose that the equilibrium rate (interest rate) iO has been established in the money market, which acts as an external factor in relation to the commodity market. In the commodity market at this interest rate, entrepreneurs will be ready to present investment demand in the amount of IO (square II). In order for it to be fully satisfied, it is necessary to offer savings in the amount of SO (square III), which is possible with a corresponding income of YO (square IV). Thus, the rate of interest iO unambiguously corresponds to income YO, which reflects the equilibrium point ЕО (square I).

If a different equilibrium interest rate has been established in the money market, for example, i1, then it corresponds to investment demand I1 and its equal supply of savings S1 with income Y1. A one-to-one correspondence between the interest rate i1 and income Y1 is established at point E1 (square I).

Repeating similar reasoning for other values of the interest rate, each time we will get more and more equilibrium points E (square I).

Combining the obtained points, we obtain the macroeconomic equilibrium curve of the commodity market, called “investment - savings”, i.e. IS.

The macroeconomic equilibrium of the commodity market is very unstable, for there is no certainty that investments will necessarily coincide with savings. There are three options for the relationship between them:

Imbalance towards investment demand, I? S

Imbalance in the direction of the supply of savings, S? I

Total investment and savings are balanced in terms of I = S.