Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 16 The Economics of Investment Behavior Copyright © 2012 Pearson Addison-Wesley. All rights reserved. The Historical Instability of Investment • Recall: Gross Domestic Private Investment (GDPI) includes spending on plant, equipment, inventories, and housing. • Historically investment has been more volatile than consumption spending. – In the 1973-75 recession, GDPI fell 31%. – In the subsequent boom, GDPI grew by 46%. – In the 1981-82 recession, fell 26%. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-2 The Components of GDPI • GDPI is divided into two main parts, which also have subcomponents as follows: – Fixed Investment • Residential • Nonresidential – Nonresidential Structures – Producers’ Durable Equipment – Inventory Change • The behavior of the three major components of GDPI is shown in Figure 16-1 and summarized below: – Residential investment turns early. – Inventor change exhibits sharp but short-lived swings. – Fixed nonresidential investment has soared in size. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-3 Figure 16-1 Real Gross Private Domestic Investment and Its Four Components, 1960– 2010 Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-4 The Accelerator Hypothesis • The Accelerator Hypothesis states that the level of net investment depends on the change in expected output. • Firms attempt to maintain a fixed ratio of their stock of capital to their expected sales (Ye). – Expected sales are assumed to be estimated using adaptive expectations: Y Y j (Y1 Y ) e Copyright © 2012 Pearson Addison-Wesley. All rights reserved. e 1 e 1 16-5 The Accelerator Hypothesis (cont.) • The accelerator hypothesis assumes that the desired stock of capital (K*) is a multiple of expected sales: K* = v*Ye • Net investment is the change in the capital stock: In = ∆K = K – K-1 Assuming that capital is acquired quickly, In = K* - K*-1 In = v*∆Ye • When there is an acceleration in business and expected output increases, net investment is positive. – If expect output stops increasing, In falls to zero. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-6 Table 16-1 Workings of the Accelerator Hypothesis of Investment for the Hypothetical Mammoth Electric Company Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-7 Figure 16-2 The Behavior of Actual Sales, Expected Sales, Gross Investment, Net Investment, and Replacement Investment for the Mammoth Electric Company Described in Table 16-1 Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-8 Investment and Real GDP • The relationship between I and GDP is the same as between In and Ye according to the accelerator hypothesis. – In the special case where expected sales are always set exactly equal to last period’s actual sales: In = v*∆Y-1 • This simplest form of the accelerator theory was invented by J.M. Clark in 1917. – According to this theory, investment is inherently unstable since any temporary change in output could lead to a significant change in investment spending. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-9 Assessing the Simple Accelerator • There are three main problems with the simple accelerator theory based on historical U.S. data: – In does not respond instantaneously to changes in output growth, but rather displays noticeable lags. – These lags are not uniform in length, not does In respond to changes in real GDP growth with uniform speed. – The In/Y does not have a consistent relationship to real GDP growth. • Further, despite the investment boom of the late 1990s, the overall average level of In/Y was substantially lower than before 1990. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-10 Figure 16-3 The Relation of the Net Investment Ratio (In/Y) to the Growth Rate of Real GDP (Y/Y) in the U.S. Economy, 1960–2010 Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-11 The Flexible Accelerator • The Flexible Accelerator theory of investment loosens several assumptions of the simple accelerator theory: – Instead of assuming Ye = Y-1 , the flexible accelerator theory allows for adaptive expectations. – The flexible accelerator theory no longer assumes that v* is constant. – Capital formation is no longer assumed instantaneous. • Determinants of gross investment – The fraction of the gap between K* and last period’s actual capital that can be closed in a single period. – The response of Ye to last period’s error in estimating actual output. – The proportion of the capital stock that is replaced each year. – The desired ratio of capital to expected output (v*). Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-12 The Neoclassical Theory of Investment • In the 1960s, Harvard’s Dale Jorgenson showed that the user cost of capital could be derived from neoclassical microeconomic theory. • An extra unit of capital will be purchased if the expected Marginal Product of Capital (MPK) is at greater than or equal to the User Cost of Capital (u): MPK ≥ u – MPK is the extra output that a firm can produce by adding an extra unit of capital. – u is the cost to the firm of using a piece of capital for a specified period. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-13 Policies to Affect u • The user cost of capital (u) depends on several factors: – An interest cost is involved in buying a capital good. – Physical deterioration lessens the production ability of every capital good; in addition some capital goods become obsolete. • The Depreciation Rate is the annual percentage decline in the value of a capital good due to physical deterioration and obsolescence. – The interest and depreciation cost are adjusted by price changes for capital goods. • Monetary and fiscal policies that lower the interest rate will lower u and therefore increase I. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-14 Figure 16-4 The Effect of a Drop in the User Cost of Capital (u) on the Desired Capital-Output Ratio (v *) Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-15 Taxation and Investment • Fiscal policy can also affect the user cost of capital directly via taxes: – A higher tax on firms’ profits will raise the effective user cost of capital for firms. – Firms can cut their corporate income tax by deducting the value of depreciation of plant and equipment, so the government can affect investment by liberalizing or tightening tax laws. – During most of the 1962-86 period, a substantial part of investment in the U.S. was eligible for an investment tax credit. • Typically the tax credit would allow firms to deduct 10% of the value of their equipment investment from their corporate income taxes. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-16 Investment in the Great Depression and World War II Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-17 International Perspective The Level and Variability of Investment Around the World Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-18 Figure 16-5 Effect on Output and the Interest Rate of a Shift in the Level of Investment Relative to the Interest Rate Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 16-19