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1、CHAPTER 15INVESTMENT SPENDINGChapter Outline The volatility of investment The demand for capital The marginal product of capital Real and nominal interest rates Taxes, investment tax credits, and the rental cost of capital The q-theory of investment Business fixed, residential, and inventory investm
2、ent Credit rationing and internal sources of financing Discounted cash flow analysis The accelerator modelChanges from the Previous Edition:The material in Chapter 15 has remained largely intact but has been updated, particularly Figures 15-1, 15-6, 15-7, 15-8, 15-9, and Tables 15-3 and 15-4. New Fi
3、gure 15-11 and a new paragraph on inventories during the Great Recession have been added at the end of Section 15-2.Introduction to the MaterialGross private investment spending has averaged only about 13% of total U.S. GDP in recent years. However, it has been the most volatile major component of G
4、DP and has a significant impact on economic cycles. Furthermore, net investment adds to a nations productive capacity, contributing to long-term growth. Thus it is important to understand how investment decisions are made. As we have learned in previous chapters, investment is strongly influenced by
5、 changes in interest rates and serves as an important link through which monetary policy affects the economy.It is important to distinguish between gross and net investment. Net investment adds to the existing capital stock and therefore eventually influences aggregate supply. Gross investment, on t
6、he other hand, most directly influences aggregate demand. The difference between gross and net investment is depreciation, which is determined not only by the wear and tear on machines in the production process but also by their continued usefulness. For example, outdated computers may still be in g
7、ood working condition but are nonetheless frequently replaced with newer and more efficient ones so productivity can be increased.Not all investment spending is affected by fiscal and monetary policy measures in the same way, therefore we distinguish between three broad categories of investment: bus
8、iness fixed, residential, and inventory investment. Chapter 15 focuses on private domestic investment in capital (machines, housing and inventory), but public investment (schools, infrastructure, etc.) and investment in human capital (such as education and health) also are important in determining t
9、he productive capacity of a nation.fraction of GDP that is devoted to investment has a significant impact on a countrys economic growth rate. Can the government stimulate investment enough to sustain a high economic growth rate over a long time period and how should this be done? The growth in the U
10、.S. economy in the late 1990s that was largely fueled by investment in computer technology can serve as a good example to create some interesting classroom discussion. However, it also should be noted that, assuming sufficient resources are available, it is easier for a developing country to enhance
11、 economic growth-at least initially-by devoting a larger share of its GDP to investment than it is for a country that is already well developed and has a high living standard.Finally, it should be stressed again that investment decisions depend on several factors, including: sales expectations, the
12、cost of capital (which in itself depends on nominal interest rates, expected inflation, rate of depreciation, the corporate income tax, and investment tax credits), the cost of other inputs (wages), the degree of capital utilization, credit availability, and the time it takes to plan, order, and ins
13、tall new capital equipment.Additional ReadingsAllen, DonaldWheres the Productivity Growth (from the Information Technology Revolution)? Review, FRB of St. Louis, March/April, 1997.Allen, Donald, Changes in Inventory Management and the Business Cycle J Review. FRB of St. Louis, July/August, 1995.Bern
14、anke, B. and Gertler, M., “Inside the Black Box: The Credit Channel of Monetary Policy Transmission/9 Journal of Economic Perspectives, Fall, 1995.Cooper, R. and Haltiwanger, J,On the Nature of Capital Adjustment Costs J Review of Economic Studies, July, 2006.Feldstein, M. and Summers, L.Inflation,
15、Tax Rules and the Long-Term Interest Rate J Brookings Papers on Economic Activity, 1978 (1).Gertler, M. and Hubbard, G,“Financial Factors in Business Investment/ in Financial Market Volatility. FRB of Kansas City, 1989.Gordon, Robert, Does the New Economy Measure Up to the Great Inventions of the Pa
16、st?” Journal of Economic Perspectives, Fall, 2001.Grossman, Herschel, A Choice Theoretical Model of Income-Investment Accelerator/9 American Economic Review. September, 1972.Jaffee, D. and Stiglitz, J,“Credit Rationing/9 in Friedman B. and Hahn, F. (eds.) Handbook of Monetary Economics, NorthHolland
17、, Amsterdam, 1990.Jorgenson, D.，and Stiroh, K.，“Raising the Speed Limit: U.S. Economic Growth in the Information Age J Brookings Papers on Economic Activity, 2000 (1).Jorgenson, Dale, Economic Studies of Investment Behavior: A Survey J Journal of Economic Literature. December, 1971.Meltzer, Alan, Mo
18、netary, Credit (and Other) Transmission Processes: A Monetarist Perspective/ Journal of Economic Perspectives. Fall, 1995.Mork, A.，Shleifer, A.，and Vishny, R.，“The Stock Market and Investment J Brookings Papers on Economic Activity. 1990.Oliner, S.，and Sichel, D., The Resurgence of Growth in the Lat
19、e 1990s: Is Information Technology the Story?” Journal of Economic Perspectives, Fall, 2000.Oliner, S.，and Rudebusch, G.，“Is There a Broad Credit Channel for Monetary Policy?” Economic Review, FRB of San Francisco, Vol. (1), 1996.Rappaport, Jordan, The Affordability of Homeownership to Middle-Income
20、 Americans/9 Economic Review. FRB of Kansas City, Fourth Quarter, 2008.Samuelson, Paul, The Interaction Between the Multiplier Analysis and the Principle of Acceleration/9 Review of Economics and Statistics, May, 1939.Summers, Lawrence, Taxation and Corporate Investment: A q-Theory Approach J Brooki
21、ngs Papers on Economic Activity, 1981.Syron, Richard, “Are We Experiencing a Credit Crunch? New England Economic Review, FRB of Boston, July/August, 1991.Learning ObjectivesStudents should know the three categories of investment (business fixed, residential, and inventory investment) and how each ca
22、tegory is affected by changing economic conditions. Students should understand the role of housing starts and inventory changes as economic indicators. Students should know that the accelerator model implies that the level of investment depends on the change in output and not the level of output. St
23、udents should know that business fixed investment generally responds with long lags to changes in the level of output. Students should understand the role of investment in economic cycles and in future economic growth. Students should know that the desired capital stock increases with increases in e
24、xpected output and decreases with increases in the rental cost of capital. Students should be familiar with the concept of diminishing marginal product of capital. Students should know that the rental cost of capital increases with increases in the nominal interest rates, the rate of depreciation, a
25、nd the corporate income tax, but decreases with increases in inflation and investment tax credits. Students should understand why the effects of temporary investment tax credits on investment are different from the effects of temporary tax changes on consumption. Students should be able to distingui
26、sh between the real and nominal interest rates, and know that the real rate of interest is most important for investment decisions (except for housing investment, which is affected by both the real and nominal rates). Students should be familiar with the discounted cash flow analysis and know that t
27、his analysis is consistent with the neoclassical theory of investment. Students should understand how monetary and fiscal policy changes affect the level of investment spending. Students should understand the importance of internal funds in financing investment spending, especially when credit ratio
28、ning occurs. Students should understand why a booming stock market is generally good for investment. Students should know that a firms inventory-to-sales ratio can rise rapidly during a recession when sales may drop quickly while inventories can be eliminated only slowly. Students should know that t
29、he use of computer technology and just-in-time management techniques can help keep the inventory-to-sales ratio low and thus reduce the volatility of the economy.Solutions to the Problems in the TextbookConceptual Problems1. Even if the economy has achieved the desired capital stock, some gross inve
30、stment must still take place to keep the capital stock at this level. The level of investment has to be sufficient to cover depreciation, that is, the amount of capital that has to be replaced due to wear and tear in the production process or because equipment becomes obsolete.2. High-tech capital (
31、such as computers) becomes obsolete at a very fast rate and thus needs to be replaced more often if firms want to stay competitive. Therefore the rate of depreciation will increase if more is invested in high-tech capital.Human capital also depreciates since knowledge tends to become outdated (new t
32、heories are advanced and new discoveries are made continuously). Therefore knowledge also needs to be updated and we need to continually invest in human capital. Who, for example, wants to be treated by a physician who hasn*t kept up with new advances in medical technology? Similarly, health is also
33、 a form of human capital and, as we grow older, our stock of health tends to depreciate. The more we invest in health, that is, the healthier we live and the more preventive measures we take, the slower our stock of human capital depreciates and the more able we are to maintain our level of producti
34、vity.3. The interest rate does not simply affect the rental cost of capital, but should also be considered as an opportunity cost. Retained earnings, that is, the funds available from profits that are not paid out in dividends, can either be used to invest in new machinery or to make loans. In other
35、 words, at any time a firm can use its retained earnings to make a financial investment by providing funds to someone who needs them. A firm can, for example, buy government bonds or commercial papers and earn interest. If the yield on government bonds or commercial papers is higher than the expecte
36、d rate of return on an investment in real capital, a firm may choose not to undertake capital investment and instead “invest” in a security. Note, however, that the buying of securities really constitutes an act of saving and not investment.4. Tn an efficient stock market, the price of a share of st
37、ock in a company should be equal to the price of a claim on the existing capital in the company. Tobins q is an estimate of the value the stock market places on a firms assets relative to the cost of producing those assets. In other words, it can be thought of as the ratio of the market value of a f
38、irm to the replacement cost of capital. The replacement cost of capital is a measure for the marginal cost of capital. If q isgreater than 1, the firm should add physical capital, since for each dollars worth of new machinery it purchases, it can sell stock for q dollars. However, this implies that
39、the marginal product of capital exceeds its marginal costs.5. A sudden increase in the demand for a firm*s product will not only unexpectedly deplete the firms inventories but also increase expectations of future sales. This may induce the firm to increase its production as well as the desired capit
40、al stock. The latter will require an increase in net investment. The speed with which the capital stock is increased to its new desired level depends on whether the firm believes that the increase in sales is permanent or temporary and on the cost of adjusting the capital stock to its new desired le
41、vel. Some forms of capital investment also require a longer period of planning, ordering, and installing than others.6. Large firms tend to have easier access to credit than small firms, since large firms are more likely to have an established relationship with a bank and a good credit rating. Small
42、 firms are often limited in their investment opportunities by their retained earnings, thus they will invest less in a recession than they otherwise might have because credit is not available to them and profits are down. On the other hand, in a boom small firms are likely to invest more than they w
43、ould otherwise, since profits are high and they want to compensate for the lack of investment during the preceding downturn. Therefore, if we have many more small firms than large firms, we may observe larger output fluctuations over the business cycle.7. a. When profits are high, more internal fund
44、s are available to firms to finance new investment projects, especially at times when outside funding is not easily accessible. Higher profits may come from increased sales. This may make entrepreneurs more optimistic about future sales and encourage them to increase investment spending. Higher prof
45、its also mean higher dividends, and this may attract more financial investors. But if more financial investors buy stocks, stock values are driven up. Firms are more inclined to raise new funds for new investment by selling equity if stock values are high. It should be noted, however, that higher pr
46、ofits and the availability of internal funds do not negate the fact that the cost of capital still is an important factor in investment decisions. Any yield (interest) that could be earned on funds that are invested in financial securities has to be seen as an opportunity cost.8. b. Banks may ration
47、 credit since they know that high interest rates may deter a cautious entrepreneur but not a more reckless one. Entrepreneurs who take more risks are also more likely to fail and default on their loans. Thus, in times of tight funds, rationing credit may be a more effective way for banks to ensure p
48、rofits than increasing the interest rate on loans.9. a. A house purchase is different from the purchase of a non-durable consumption good, since homebuyers can delay the purchase of a house until market conditions are favorable. Mortgage rates are an important consideration in buying a house as even
49、 a small change in the mortgagerate can greatly affect a homebuyers monthly payments. Therefore, most people will wait to buy a home until interest rates are fairly low and more prospective buyers can qualify for a mortgage. On the supply side, housing developers with large financing needs are more likely to undertake new construction if the cost of credit is low. Therefore we see that low real mortgage rates are go