"Investment is always likely to be more volatile than other elements of "Investment is always likely

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“Investment is always likely to be more volatile than other elements of “Investment is always likely

The volatility of the level of investment is one of the most repeatedly observed features of most economies. Although the fluctuations of an economy over time affect all of the variables that are used by economists to show the current state of prosperity (for example national income, production, employment, prices, etc.), the level of investment has been noted for being particularly volatile. In discussing whether this will always be the case, various hypotheses and theorems regarding the behaviour of investment and its relationship to other elements of the economy will have to be considered.

The first problem that has to be surmounted is the issue regarding what investment actually is. An economy’s resources can either be consumed immediately (consumption), or added to the fixed capital stock in order to use at a later date. This is a basic definition of investment. It is worth noting in passing that both consumption and investment form part of aggregate demand. The level of investment in an economy is usually defined as the expenditure on fixed assets for either replacing old equipment or adding to stock. This is known as “Gross Domestic Fixed Capital Formation” (GDFCF). Unfortunately, the composition of GDFCF is somewhat arbitrary in practice as only investment in the business sector of the economy is considered. The general cause for concern regarding this is the example of the same product being purchased for use at home and for business. In the former example, it will not count as part of GDFCF, but if the owner is self-employed and intends to use it for business, it will count as investment. The rationale appears to be that a business will utilise the product to contribute more output to the economy.

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GDFCF is, however, a gross calculation, which means that it neither takes into account the fact that some capital goods are purchased in order to replace others, nor are the affects of depreciation considered. Although net investment would in theory take account of these issues, there are many practical difficulties regarding the obtaining of the relevant data, thus rendering the process too complicated and difficult to undergo. Thus, the gross form of the data is used, albeit with its inherent defects knowingly recognised.

The volatility of the level of investment in recent times can be shown by the fact ...

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