Why is Investment important for Economy?

Economic growth within a country or nation has a link to investments. Economic growth is usually the outcome of corporations and other entities engaging in effective business investment strategies.

Investing has accelerated at an incredible rate over the last quarter-century. And alterations in this investment flow are increasingly changing the global economic landscape.

Over the last decade, inward foreign direct investment stock has tripled worldwide. It is also true for both developing and industrialized nations.

Influence of Investment on Economic Growth

Economic growth has always been driven by increased production of commodities and services in general. Higher consumer spending increases international trade. The corporations increasing capital expenditures can all impact the volume of products and services produced in an economy.

Investment and Aggregate Demand

Changes in investment levels cause impacts on aggregate demand in the shorter run. A reduction in interest rates will cause an economy’s investment aggregate demand to increase. It will cause an increase in the multiplier effect, which will result in the right shift of the investment aggregate demand curve. Resultantly, the real GDP demanded at the given price level will increase.

However, if there is an increase in interest rate, it will result in a decrease in the investment aggregate demand curve. The Multiplier effect will start decreasing, and the investment demand curve will shift to the left. It will cause a reduction in real GDP demanded at a given price level.

Investment and Economic Growth

Economic growth has a link with Investment. The Investment adds to the capital of an economy. The quantity of capital available in an economy is an essential determinant of the economy’s productivity. Hence, the Investment contributes to growth.

The increase in the capital of an economy shifts the production curve outwards. It means shifting its long-run aggregate investment supply curve to the right. However, with the increased capital, the Investment in an economy will increase and vice versa.

Investment and Supply

Effective Investment in an economy can help boost the long-run aggregate supply. In an economy, Investment helps increment labor productivity, skills enhancement, technological improvements, and production capacity. This shifts the long-run aggregate supply curve to the right. Right shifting of the long-run supply curve is crucial for economic growth. It helps the economy to grow without inflation.

Furthermore, if there is a high increase in Investment, it also leads to an increase in the long-run trend rate of economic growth, termed “The average sustainable rate of growth.”

Investment and the Multiplier Effect

A significant rise in Investment can also cause a multiplier effect. However, this will depend on the availability of the spare capacity. The initial increase in investment leads to economic growth, but if businesses see higher sales and profits, they are more likely to reinvest in more Investment.

Additionally, households that get work because of the Investment have more money to spend. As a result, a $4 billion investment might result in a final rise in real GDP of $5 billion. (1.25 multiplication impact)

You can also visit https://investorunner.com to explore more options for investments.

 

Sources: https://2009-2017.state.gov/e/rls/rmk/20092013/2010/146894.htm