Suggested answer for Macro tutorial package

Question 13a

In the study of macroeconomics, investment can take many forms including foreign direct
investment, fixed capital investment and investment in human capital.

(a) Explain what is meant by these different types of investment. [10]

Cue word: Key words:

different types of Investments: spending on

Explain to give
investment capital goods
reasons
- FDI, capital investment,
human capital
investment and
Sub-questions: What is investment? What government investment
are the types of investment?

Suggested full-length answer

Introduction:
Investment refers to spending over a period of time (a year) on capital goods Definition of
not intended for current consumption but to aid the future production of investment
consumer goods.

Foreign direct investment (FDI) refers to the inflow of long-term capital into
an economy, for example, plants, by foreign firms. FDI also includes spending Definition of each
on research and development (R & D) by foreign firms. For example, in Feb type of
2012, Rolls Royce, a British aviation firm, built a new manufacturing, research investment
and training centre in Singapore. spending

Fixed capital investment (Private domestic spending) refers to spending

on capital goods by domestic firms. Fixed capital investment spending is
usually undertaken by a firm to raise its capacity to produce more goods, eg,
investment in new plants as well as raise the firms productive efficiency eg
investment in newer cost-saving plants. R & D spending by a domestic firm
also counts as part of fixed capital investment. Fixed capital investment also
includes government spending to upgrade physical infrastructure such as
road, rail and sea/air transport as well as communications network in the
country.

Human capital investment refers to spending to enhance the quality of

labour (knowledge and skills) that is, to make labour more productive.
Investment in human capital is done by the public sector (i.e. government) as
well as the private sector. Government spending to enhance human capital
includes spending on education and training and skills upgrading programme
for workers (for example, Singapores SkillsFuture Programme in 2015 which
aims to maintain and upgrade the skills of Singaporean workers). Firms in the
private sector also engage in human capital investment through their own

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Suggested answer for Macro tutorial package

internal training and development programme for their workers. Firms

undertake investment in human capital spending because a more productive
worker helps the firm to stay competitive.

Public (Governmental) investment in capital is largely a political

decision. The government of Singapore has pursued a policy of substantial
investment largely aimed at improving the infrastructure, education and
public housing. Interest rates do not have much bearing on such
investment. In fact, public investment may be used as part of expansionary
fiscal policy. As such, such investments tend to increase in times of
recession.

In terms of AD-AS analysis, increases in FDI, capital investment, human

capital investment and government investment can be seen as to raise the
investment expenditure or government expenditure (in the case of public
investment) of AD and thus increase aggregate demand (AD) in the economy.
They also both increase aggregate supply (AS) in the long run as more
factories, capital equipment, and more productive workers raise the
economys capacity to produce more goods and services over time.

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