Identify the key factors that determine the level of investment in a modern economy and comment on the view that the accelerator model of investment is too limited to offer a full explanation

The first 200 words of this essay...

Identify the key factors that determine the level of investment in a modern economy and comment on the view that the accelerator model of investment is too limited to offer a full explanation

The term 'investment' in economics refers to the use of capital to create productive facilities such as plant and equipment, buildings and so on. It can also refer to expenditure on 'human capital', that is, investment on education and training as an investment in the quality of the labour force. Total investment includes spending by firms and Government on all types of capital goods and makes up about one-fifth of total spending in an economy.

Investment inevitably requires a sacrifice. Usually the sacrifice is reduced consumer expenditure in order to free capital resources for investment today so that output can be higher tomorrow. Investment is the most volatile element of national expenditure and changes in this important variable generate, in turn, multiplier effects on the rest of the economy. It is, perhaps, the single most crucial element in determining the success of the economy and cyclical instability and economic growth are thought to be closely related correlated with the trends in investment expenditure.