MODULE 03

Investment: A Determinant of Income

An investment is an asset or item
acquired with the goal of generating
income or appreciation.
Appreciation refers to an increase in
the value of an asset over time.
An investment always concerns the
outlay of some asset today—time,
money, or effort—in hopes of a
greater payoff in the future.
An investment can refer to any
mechanism used for generating future
income. This includes the purchase of
bonds, stocks, or real estate property,
among other examples.

Additionally, purchasing a property

that can be used to produce goods can
be considered an investment.
Economic Investments
Within a country or a nation,
economic growth is related to
investments. When companies and
other entities engage in sound
business investment practices, it
typically results in economic growth.
For example, if an entity is engaged in
the production of goods, it may
manufacture or acquire a new piece of
equipment that allows it to produce
more goods in a shorter period of
time.
Firms invest for two primary reasons:
Firstly, investment may be required to
replace worn out, or failing
machinery, equipment, or buildings.
This is referred to as capital
consumption, and arises from the
continuous depreciation of fixed
capital assets.
Secondly, investment may be
undertaken to purchase new
machinery, equipment, or buildings in
order to increase productive capacity.
This will increase competitiveness,
and raise profits.
If an airline replaces five worn out
aircraft with identical new aircraft, and
purchases two more aircraft in order to
be able to fly to more destinations, then
gross investment is seven,
replacement investment is five, and
net investment is two.
In economic theory, net investment carries
more significance, as it provides the basis
for economic growth.
In terms of the whole economy, the
amount of business profits is a good
indication of the potential reward for
investment.

Determinants of Investment:
The expected return on the
investment
Investment is a sacrifice, which
involves taking risks. This means that
businesses, entrepreneurs, and capital
owners will require a return on their
investment in order to cover this risk,
and earn a reward.
Business confidence
Similarly, changes in business
confidence can have a considerable
influence on investment decisions.
Uncertainty about the future can
reduce confidence, and means that
firms may postpone their investment
decisions until confidence returns.
Interest rates.
If interest rates rise, the opportunity
cost of investment rises. Investment
decisions may be postponed until
interest rates return to lower levels.
(from making a loan)
Firms may anticipate that consumers
will reduce their spending, and the
benefit of investing will be lost.
 THANK YOU.
• References:
• https://www.investopedia.com/terms/i/investment.asp
• https://www.economicsonline.co.uk/Managing_the_economy/Inve
stment.html

• https://www.economicsdiscussion.net/investment/investment-and-
its-determinants/26009

• For Classroom discussion use only

• https://www.youtube.com/watch?v=N9VIsauE0RA