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1、MACROECONOMICSC H A P T E R 2007 Worth Publishers, all rights reservedSIXTH EDITIONSIXTH EDITIONPowerPointPowerPoint Slides by Ron Cronovich Slides by Ron CronovichN. GREGORY MANKIWInvestment17slide 1In this chapter, you will learnleading theories to explain each type of investmentwhy investment is
2、negatively related to the interest ratethings that shift the investment functionwhy investment rises during booms and falls during recessionsCHAPTER 17 Investmentslide 2Three types of investmentBusiness fixed investment:businesses spending on equipment and structures for use in production.Residentia
3、l investment:purchases of new housing units (either by occupants or landlords).Inventory investment:the value of the change in inventories of finished goods, materials and supplies, and work in progress.CHAPTER 17 Investmentslide 3U.S. investment and its componentsBillions of 1996 dollars-2500250500
4、7501000125015001750200019701975198019851990199520002005Total investmentBusiness fixed investmentResidential investmentChange in inventoriesCHAPTER 17 Investmentslide 4Understanding business fixed investmentThe standard model of business fixed investment: the neoclassical model of investmentShows how
5、 investment depends onMPKinterest ratetax rules affecting firmsCHAPTER 17 Investmentslide 5Two types of firmsFor simplicity, assume two types of firms:1. Production firms rent the capital they use to produce goods and services.2. Rental firms own capital, rent it to production firms.In this context,
6、 “investment” is the rental firms spending on new capital goods.CHAPTER 17 Investmentslide 6The capital rental marketProduction firms must decide how much capital to rent.Recall from Chap. 3:Competitive firms rent capital to the point where MPK = R/P. Kcapital stockreal rental price, R/Pcapital supp
7、lycapital demand (MPK)equilibrium rental rateCHAPTER 17 Investmentslide 7Factors that affect the rental priceFor the Cobb-Douglas production function, the MPK (and hence equilibrium R/P ) isThe equilibrium R/P would increase if:K (e.g., earthquake or war)L (e.g., pop. growth or immigration)A (techno
8、logical improvement, or deregulation)CHAPTER 17 Investmentslide 8Rental firms investment decisionsRental firms invest in new capital when the benefit of doing so exceeds the cost.The benefit (per unit capital): R/P, the income that rental firms earn from renting the unit of capital to production fir
9、ms.CHAPTER 17 Investmentslide 9The cost of capitalComponents of the cost of capital:interest cost: i PK, where PK = nominal price of capitaldepreciation cost: PK, where = rate of depreciationcapital loss: PK (a capital gain, PK 0, reduces cost of K )The total cost of capital is the sum of these thre
10、e parts:CHAPTER 17 Investmentslide 10Then, interest cost = depreciation cost = capital loss = total cost =The cost of capitalExample: car rental company (capital: cars)Suppose PK = $10,000, i = 0.10, = 0.20, and PK/PK = 0.06 Nominal cost of capital$1000$2000 $600$2400CHAPTER 17 Investmentslide 11The
11、 cost of capitalFor simplicity, assume PK/PK = . Then, the nominal cost of capital equals PK(i + ) = PK(r + ) and the real cost of capital equalsThe real cost of capital depends positively on:the relative price of capitalthe real interest ratethe depreciation rateCHAPTER 17 Investmentslide 12The ren
12、tal firms profit rateA firms net investment depends on its profit rate:If profit rate 0, then increasing K is profitableIf profit rate 1, firms buy more capital to raise the market value of their firms.If q cost of capital, then profit rate is high, which drives up the stock market value of the firm
13、s, which implies a high value of q. If MPK cost of capital, then firms are incurring losses, so their stock market values fall, so q is low. CHAPTER 17 Investmentslide 21The stock market and GDPReasons for a relationship between the stock market and GDP:1.A wave of pessimism about future profitabili
14、ty of capital wouldcause stock prices to fallcause Tobins q to fall shift the investment function downcause a negative aggregate demand shockCHAPTER 17 Investmentslide 22The stock market and GDPReasons for a relationship between the stock market and GDP:2.A fall in stock prices wouldreduce household
15、 wealthshift the consumption function downcause a negative aggregate demand shockCHAPTER 17 Investmentslide 23The stock market and GDPReasons for a relationship between the stock market and GDP:3.A fall in stock prices might reflect bad news about technological progress and long-run economic growth.
16、 This implies that aggregate supply and full-employment output will be expanding more slowly than people had expected.CHAPTER 17 Investmentslide 24The stock market and GDPPercent change from 1 year earlierPercent change from1 year earlier-30-20-100102030405019701975198019851990199520002005-6-4-20246
17、810Stock prices (left scale)Real GDP (right scale)CHAPTER 17 Investmentslide 25Alternative views of the stock market: The Efficient Markets HypothesisEfficient Markets Hypothesis (EMH):The market price of a companys stock is the fully rational valuation of the company, given current information abou
18、t the companys business prospects. Stock market is informationally efficient: each stock price reflects all available information about the stock. Implies that stock prices should follow a random walk (be unpredictable), and should only change as new information arrives. CHAPTER 17 Investmentslide 2
19、6Alternative views of the stock market: Keyness “beauty contest”Idea based on newspaper beauty contest in which a reader wins a prize if he/she picks the women most frequently selected by other readers as most beautiful. Keynes proposed that stock prices reflect peoples views about what other people
20、 think will happen to stock prices; the best investors could outguess mass psychology. Keynes believed stock prices reflect irrational waves of pessimism/optimism (“animal spirits”).CHAPTER 17 Investmentslide 27Alternative views of the stock market: EMH vs. Keyness beauty contestBoth views persist.
21、There is evidence for the EMH and random-walk theory (see p.498). Yet, some stock market movements do not seem to rationally reflect new information. CHAPTER 17 Investmentslide 28Financing constraintsNeoclassical theory assumes firms can borrow to buy capital whenever doing so is profitable.But some
22、 firms face financing constraints: limits on the amounts they can borrow (or otherwise raise in financial markets).A recession reduces current profits. If future profits expected to be high, investment might be worthwhile. But if firm faces financing constraints and current profits are low, firm mig
23、ht be unable to obtain funds. CHAPTER 17 Investmentslide 29Residential investmentThe flow of new residential investment, IH , depends on the relative price of housing PH /P. PH /P determined by supply and demand in the market for existing houses. CHAPTER 17 Investmentslide 30How residential investme
24、nt is determinedKH Demand(a) The market for housingSupply and demand for houses determines the equilib. price of houses. SupplyThe equilibrium price of houses then determines residential investment:Stock of housing capitalCHAPTER 17 Investmentslide 31How residential investment is determinedKH Demand
25、IHSupply(a) The market for housing(b) The supply of new housingSupplyStock of housing capitalFlow of residential investmentCHAPTER 17 Investmentslide 32How residential investment responds to a fall in interest ratesKH DemandIHSupplySupplyStock of housing capitalFlow of residential investment(a) The
26、market for housing(b) The supply of new housingCHAPTER 17 Investmentslide 33The tax treatment of housingThe tax code, in effect, subsidizes home ownership by allowing people to deduct mortgage interest.The deduction applies to the nominal mortgage rate, so this subsidy is higher when inflation and n
27、ominal mortgage rates are high than when they are low. Some economists think this subsidy causes over-investment in housing relative to other forms of capitalBut eliminating the mortgage interest deduction would be politically difficult. CHAPTER 17 Investmentslide 34Inventory investmentInventory inv
28、estment is only about 1% of GDP.Yet, in the typical recession, more than half of the fall in spending is due to a fall in inventory investment. CHAPTER 17 Investmentslide 35Motives for holding inventories1. production smoothingSales fluctuate, but many firms find it cheaper to produce at a steady ra
29、te. When sales production, inventories fall. CHAPTER 17 Investmentslide 36Motives for holding inventories1. production smoothing2. inventories as a factor of productionInventories allow some firms to operate more efficiently. samples for retail sales purposesspare parts for when machines break downC
30、HAPTER 17 Investmentslide 37Motives for holding inventories1. production smoothing2. inventories as a factor of production3. stock-out avoidanceTo prevent lost sales when demand is higher than expected. CHAPTER 17 Investmentslide 38Motives for holding inventories1. production smoothing2. inventories
31、 as a factor of production3. stock-out avoidance4. work in processGoods not yet completed are counted in inventory. CHAPTER 17 Investmentslide 39The Accelerator ModelA simple theory that explains the behavior of inventory investment, without endorsing any particular motiveCHAPTER 17 Investmentslide
32、40The Accelerator ModelNotation:N = stock of inventories N = inventory investmentAssume:Firms hold a stock of inventories proportional to their outputN = Y, where is an exogenous parameter reflecting firms desired stock of inventory as a proportion of output. CHAPTER 17 Investmentslide 41The Acceler
33、ator ModelResult: N = Y Inventory investment is proportional to the change in output.When output is rising, firms increase inventories.When output is falling, firms allow their inventories to run down.CHAPTER 17 Investmentslide 42Evidence for the Accelerator ModelInventory investment (billions of 19
34、96 dollars)Change in real GDP (billions of 1996 dollars)-40-20020406080100-200-10001002003004005001982200120041998198419781996198319671974CHAPTER 17 Investmentslide 43Inventories and the real interest rateThe opportunity cost of holding goods in inventory: the interest that could have been earned on
35、 the revenue from selling those goods. Hence, inventory investment depends on the real interest rate.Example: High interest rates in the 1980s motivated many firms to adopt just-in-time production, which is designed to reduce inventories.CHAPTER 17 InvestmentChapter Summary1.All types of investment
36、depend negatively on the real interest rate.2.Things that shift the investment function:Technological improvements raise MPK and raise business fixed investment.Increase in population raises demand for, price of housing and raises residential investment.Economic policies (corporate income tax, inves
37、tment tax credit) alter incentives to invest. CHAPTER 17 Investmentslide 44CHAPTER 17 InvestmentChapter Summary3.Investment is the most volatile component of GDP over the business cycle.Fluctuations in employment affect the MPK and the incentive for business fixed investment.Fluctuations in income affect demand for, price of housing and the incentive for residential investment. Fluctuations in output affect planned & unplanned inventory investment. CHAPTER 17 Investmentslide 45CHAPTER 17 Investment
