How does investment as defined by economists differ from...

Name: Problem 5, Chapter 26: Economics
Uploaded: 2020-05-28T17:44:12-08:00
Duration: 2 min 35 s
Channel: Mihir Nayar
Description: How does investment as defined by economists differ from investment as defined by the general public? What would happen to the amount of economic investment made today if firms expect the future returns to such investment to be very low? What would happen to the amount of economic investment today if firms expect future returns to be very high?

How does investment as defined by economists differ from investment as defined by the general public? What would happen to the amount of economic investment made today if firms expect the future returns to such investment to be very low? What would happen to the amount of economic investment today if firms expect future returns to be very high?

Key Concepts

Role of Expected Future Returns

Firms make investment decisions by evaluating the anticipated future returns on their capital expenditures. If the expected future returns are high, the potential for profit justifies investing more today, as the benefits from increased production capacity and efficiency are forecasted to outweigh current costs. Conversely, if the expected returns are very low, firms are likely to curtail or postpone new investments since the anticipated profits do not justify the expense.

Impact of Future Return Expectations on Present Investment

The level of economic investment today is directly influenced by firms’ expectations of future profitability. High expectations lead to increased current economic investment because firms aim to exploit expected growth opportunities, while lower expectations result in reduced investment spending as firms become cautious about committing resources to projects that may not yield adequate returns.

Economic Investment vs. General Investment

Economists define investment as spending on capital goods that are used to increase future production capacity, such as purchasing machinery, building factories, or research and development. This is distinct from the general public’s notion of investment, which often refers to buying financial assets like stocks or bonds for future income or capital gains, rather than the production of new physical capital.

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