![]() ![]() There current rate of 20% will fall to 19% in 2017, and then to 18% in 2020. Corporation taxįirms pay corporation tax on their profits, so a reduction in tax increases the profits they retain after tax is paid, and this acts as an incentive to invest. Any indication of a downturn in the economy, a possible change of government, war or a rise in oil or other commodity prices may reduce the expected benefit or increase the expected cost of investment. Therefore, a predicted fall is likely to discourage firms from investing and force them to postpone their investment decisions.īecause investment is a high-risk activity, general expectations about the future will influence a firm’s investment appraisal and eventual decision-making. Investing to expand requires that consumers at least maintain their current spending. Secondly, if interest rates rise, firms may anticipate that consumers will reduce their spending, and the benefit of investing will be lost.Hence, investment decisions may be postponed until interest rates return to lower levels. This means that a rise in interest rates increases the return on funds deposited in an interest-bearing account, or from making a loan, which reduces the attractiveness of investment relative to lending. Firstly, if interest rates rise, the opportunity cost of investment rises.Investment is inversely related to interest rates for two main reasons. Investment is inversely related to interest rates, which are the cost of borrowing and the reward to lending. Economic theory suggests that, at the macro-economic level, small changes in national income can trigger much larger changes in investment levels. Changes in national incomeĬhanges in national income create an accelerator effect. Uncertainty about the future can reduce confidence, and means that firms may postpone their investment decisions until confidence returns. Similarly, changes in business confidence can have a considerable influence on investment decisions. In terms of the whole economy, the amount of business profits is a good indication of the potential reward for investment. This means that businesses, entrepreneurs, and capital owners will require a return on their investment in order to cover this risk, and earn a reward. Investment is a sacrifice, which involves taking risks. The main determinants of investment are: The expected return on the investment This is because the underlying determinants also have a tendency to change. The level of investment in an economy tends to vary by a greater extent than other components of aggregate demand. In economic theory, net investment carries more significance, as it provides the basis for economic growth. This relationship is expressed in the following equation: Net investment = gross investment – depreciationįor example, if an airline replaces five worn out aircraft with identical new aircraft, and purchases two more aircraft in order to be able to fly to more destinations, then gross investment is seven, replacement investment is five, and net investment is two. Gross investment includes both types of investment spending, but net investment only measures new assets rather than the replacement of assets. This will reduce long-term costs, increase competitiveness, and raise profits. ![]()
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