Examples of investment in the following topics:
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- Economic investment, also referred to as capital investment, is different from and should not be confused with financial investment.
- An example of non-residential fixed investment is investment in human capital, which includes additional schooling or training.
- Inventory investment: The accumulation of goods or inventories.
- To encourage investment, interest rates need to be lower .
- Even when a firm uses its own funds on an investment, there is an opportunity cost of using the funds for investment, instead of lending out the money for interest.
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- Positive and negative demand shocks directly impact investment; increases in demand encourage higher investment while less demand lowers investment.
- Demand shocks directly impact investment.
- When income increases it encourages higher investment.
- Demand shocks only temporarily increase or decrease consumer spending and investment.
- Although demand shocks can have a positive impact on investment, the substantial swing investment usually causes an instability to results in decreased investment once the initial positive tendencies subside.
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- Both savings and investment affect the overall economy.
- Broadly, each incentive adjusts the cost of saving or investing.
- We will discuss two main ways to affect the savings and investment rates here.
- High interest rates encourage savings and discourage investment.
- Low interest rates encourage investment and discourage savings.
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- Money can either be consumed, invested, or saved (deferred consumption or investment).
- They can also invest money by lending it to a company or project with the hope of getting back more money in the future.
- Savings is essentially deferred consumption or investment; it is intended for use in the future.
- Aggregate demand met by the market is spending, be it on consumption, investment, or other categories.
- Through investment spending, savings influences aggregate demand.
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- Savings are income after-consumption and investment is what is facilitated by saving.
- Savings from this perspective facilitates capital purchase which are included in investments
- The amount of savings available in the economy is equal to the amount of funding available for investment activity.
- In this manner, financial intermediaries are a significant component to the transformation of savings into investment.
- Savings are used to fund investments, where investments are defined as expenditures on factory plants, equipment and homes.
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- For example, assume that an investor has $100 today and can invest this money at a 5% return for one year.
- A year from now the original investment will equal $105, (100)*(1.05).
- Alternatively, if an investment is valued at $125 and this value includes the 7% return generated over a one year time horizon, the original value of the investment or its present value is equal to (125)/(1.07) or 117.
- Present value: (the value of the investment at a future time)/(1 + r)n; where r is the annual interest rate and n is the number of years the investment has occurred.
- Assuming a 5% interest rate, $100 invested today will be worth $105 in one year ($100 multiplied by 1.05).
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- Each asset class has specific investment objectives; these are typically stated in a prospectus or investment description.
- However, all investments have some degree of risk in meeting the stated investment objectives or return.
- Diversification strategies can be as simple as not "placing all your eggs in one basket. " It can also be as complex as a routine evaluation of investment correlation and risk, and dynamic rebalancing of investment holdings.
- Hedging strategies can be relatively complex but, in general, they serve the role of insuring that an investor is able to meet investment performance objectives.
- Typically, an investor pays a fee and enters into the hedging strategy, which transfer the risk inherent in an investment for a constant return.
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- Risk is pervasive in the economy and is an essential component in the derivation of an asset's investment return.
- Though the attribution of acceptable inflation can be incorporated into an investment return, the actual pricing and resulting purchasing power of the investment at maturity is unknown and the uncertainty increases with time.
- Therefore, investment returns compensate holders for the time to maturity via a risk premium .
- Risk premium compensates holders for risks inherent to an investment and are incorporated in the rate of return quoted for an investment.
- For some investments, there is a potential for an issuer to call or redeem a security prior to maturity.
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- The financial account has four components: foreign direct investment, portfolio investment, other investment, and reserve account flows.
- Foreign direct investment (FDI) refers to long term capital investment such as the purchase or construction of machinery, buildings, or even whole manufacturing plants.
- Portfolio investment refers to the purchase of shares and bonds.
- To calculate the total surplus or deficit in the financial account, sum the net change in FDI, portfolio investment, other investment, and the reserve account.
- Austria has experienced a surplus of foreign direct investment: more foreign investors invest in Austria than Austrian investors do in the rest of the world.
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- A higher real interest rate increases the opportunity cost of borrowing money, decreasing the amount of interest-sensitive expenditures such as investment and consumption.
- Thus, the government has crowded out investment .
- In economics, crowding-out occurs when increased government borrowing reduces investment spending.
- The increased borrowing crowds out private investing.
- If the economy is at capacity or full employment, then the government suddenly increasing its budget deficit (e.g., via stimulus programs) could create competition with the private sector for scarce funds available for investment, resulting in an increase in interest rates and reduced private investment or consumption.