Macroeconomics: Theory and Policy

10

Theories of Investment Spending

After studying this topic, you should be able to understand

• Investment can be defined as the value of that portion of an economy’s output for any period of time that takes the form of new producer’s durable equipment, new structures and the change in inventories.
• To arrive at net investment, a deduction is made from gross investment for producer’s durable equipment and the existing structures that are used in the production process.
• The decision to invest is different as compared to the decision to buy consumer goods.
• Once the marginal efficiency of capital (MEC) is determined, a comparison of the market rate of interest with the MEC will enable one to make a decision as to whether the vestment in the capital ...