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1、14-114-2Chapter14Investment Spending Item Item Item Etc.McGraw-Hill/Irwin Macroeconomics, 10e 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.14-3IntroductionInvestment:Links the present to the futureLinks the goods and money marketsDrives much of the business cycleIn this chapter we study
2、 how investment depends on interest rates and incomeFigure 14-1 illustrates the volatility of investment by comparing investment and GDPInsert Figure 14-1 here14-4IntroductionThe theory of investment is the theory of the demand for capitalInvestment is the flow of spending that adds to the stock of
3、capital Both GDP and investment are flow variablesCapital is the dollar value of all the buildings, machines, and inventories at a given point in time stock valueInvestment is the amount spent by businesses to add to the existing capital stock over a given periodFlow of investment is quite small com
4、pared to the stock of capital.14-5The Desired Capital StockFirms use capital, along with labor and other resources, to produce output The goal of a given firm is to maximize profitsWhen deciding the optimal level of capital, firms must balance the contribution that more capital makes to their revenu
5、es against the cost of acquiring additional capitalThe marginal product of capital is the increase in output produced by using 1 more unit of capital in production.The rental (user) cost of capital is the cost of using 1 more unit of capital in production. 14-6The Desired Capital StockTo derive the
6、rental cost of capital:firms finance the purchase of capital by borrowing over time, at an interest rate of i In the presence of inflation, the nominal dollar value of capital rises over timeReal cost of capital = nominal interest rate - nominal capital gainAt the time the firm makes an investment,
7、the nominal interest rate is known, but the inflation rate for the coming year is notReal cost of borrowing is the expected real interest rate:Capital wears out over time must include depreciation, dThe complete formula for the rental cost of capital is:eir=The complete formula for the rental cost o
8、f capital is didrrce+=+=14-7The Desired Stock of CapitalFirms add capital until the marginal return of the last unit added drops to the rental cost of capitalDiminishing marginal product of capital means that each successive unit of capital yields less than the previous unit Figure 14-2An increase i
9、n the rental cost of capital can only be justified by an increase in the marginal product of capital, and a lower level of KThe general relationship among the desired capital stock, K*, rc, and output is (1)Insert Figure 14-2 here),(*YrcgK =14-8From Desired Capital Stock to InvestmentFigure 14-4 ill
10、ustrates an increase in the demand for capital stock as a rightward shift in the demand for capital scheduleAt the initial level of capital, K0, the price of capital is just high enough to generate enough investment, I0, to replace the depreciating capitalIn the LR, supply of new capital is very ela
11、stic, so the increase in demand is met without much change in priceIn the SR, price rises to P1, increasing investment flow to I1Insert Figure 14-4 here14-9Capital Stock AdjustmentThe flexible accelerator model can be used to explain the speed at which firms plan to adjust their capital stock Basic
12、notion: the larger the gap between the existing capital stock and the desired capital stock, the more rapid a firms rate of investmentFirms plan to close a fraction, , of the gap between the actual and desired capital stocks each periodCapital at the end of last period is K-1The gap between actual a
13、nd desired capital stock is (K*-K-1)A firm plans to add a fraction of the gap to last periods stockActual capital stock at the end of the current period is then (2)(1* 10+=KKKK14-10Capital Stock AdjustmentTo increase the capital stock from K-1to K0, the firm must achieve net investment of (3)Figure
14、14-5 illustrates how the capital stock adjusts from an initial level of K-1to the desired level K*Upper panel shows the stock of capital Lower panel shows the corresponding level of IInsert Figure 14-5 here)()()(1*11* 110=+=KKKKKKKKI14-11Capital Stock AdjustmentTo increase the capital stock from K-1
15、to K0, the firm must achieve net investment of (3)Equation (3) shows investment spending as a function of K* and K-1Any factor that increases K*, increases the rate of investmentInvestment contains aspects of dynamic behaviorInsert Figure 14-5 here)()()(1*11* 110=+=KKKKKKKKI14-12Investment Subsector
16、sFigure 14-6 demonstrates the volatility of the three investment subsectors:1.Business fixed investment2.Residential investment3.Inventory investmentBusiness fixed investment is the largest of the threeInventory investment is the most volatileInsert Figure 14-6 here14-13Investment SubsectorsFigure 14-7 shows residentia
