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Economics (Year 12) - Aggregate Expenditure Model

Christian Bien

What is Investment?

Investment is defined as all spending on inventories, capital expenditure and housing investment.

  • Inventories - expenditure on the production of stock

  • Capital Expenditure - expenditure on new capital equipment such as machinery and buildings -

  • Housing Investment - expenditure on the construction of new dwellings such as homes and apartments

What are the Factors of Investment?

The factors of investment are an abbreviation known as PREP-T.

  • Business Profitability - most important factor, high levels of profit allows for increased expenditure on investment.

  • Interest Rate - the market interest rate which is affected by changes in the RBA cash rate. Investments typically involve a lot of cash and are generally purchased using credit. An increase in the interest rate represents an increase in risk as the repayments are larger.

  • Business Expectations - businesses expectations for the future. High positive expectations are an indicator of positive future demand for business products/services, lowering risk on investment.

  • Government Policy - government policy, directly and indirectly, affects the level of investment. The recent $20,000 tax break for small business investment is a direct example of how government policy encourages investment.

  • Technology - businesses need to be competitive. If a competitor has more efficient capital, businesses will be obliged to invest or have the risk of falling behind. In addition, businesses can invest in new technologies to gain an advantage over competitors.

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