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Economics Notes Macroeconomic Principles Notes

Investment Notes

Updated Investment Notes

Macroeconomic Principles Notes

Macroeconomic Principles

Approximately 260 pages

In depth, typed notes covering the Macroeconomic Principles (EC210) course at LSE (London School of Economics). Covers the full content of the course including the following topics:

- Economic Measurement
- Economic Growth
- The Malthusian Model
- The Solow Model
- Endogenous Growth Models
- Consumption
- Ricardian Equivalence
- Credit Market Imperfections
- Investment
- Unemployment
- Issues in the Labour Market
- The Dynamic Macroeconomic Model
- The Dynamic Monetary Model
- Bus...

The following is a more accessible plain text extract of the PDF sample above, taken from our Macroeconomic Principles Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Investment Topics * Investment * Investment Decisions in a Two-Period Model * The q-Theory of Investment * Investment Decisions Reading Investment * Three different types of investment: a. Business fixed investment = Businesses' spending on equipment and structures for use in production b. Residential investment = Purchases of new housing units c. Inventory investment = The value of the change in inventories of finished goods, materials and supplies Graph showing the different types of investment Key Points * Types of investment * Decision to invest * What determines expected future profit of capital investment * Investment decisions in the two period model * Intuitive approach to optimal investment decision * Mathematical approach to optimal investment decision * Investment demand curve * q-theory of investment * Intuition behind Tobin's q * Mathematics behind Tobin's q * Investment decisions * Investments and asymmetric information Definitions * Business fixed investment = Businesses' spending on equipment and structures for use in production * * Efficient market hypothesis = The price of a stock is equal to the PV of future expected dividends * Inventory investment = The value of the change in inventories of finished goods, materials and supplies * Residential investment = Purchases of new housing units * Like consumers, firms are forward looking a. Investment decisions depend on expectations of the future ? Start here to explain investment theory * Decisions to buy a machine depend on two things: a. PV of additional expected profits from having this machine b. The cost of buying it * What determines the additional expected future profit of buying a machine? a. MPK: a. If there is an improvement in technology then the MPK will be higher and profits will be larger b. Taxes: * e.g. corporate income tax and investment tax credits Investment Decisions in a Two-Period Model * Use the idea of a representative firm * Use the Cobb-Douglas production function with TFP: * * Future output: * * Future capital stock: * * Current profits: * * Future profits: * * Remember in the final period we sell all capital less depreciation * PV of profits: * Tobin's q = The expected value of a corporation (value of stocks and bonds) divided by the value of its capital stock at replacement cost Formulae * * * * * * * * * * * * * * * * * This is key to deciding on whether to invest Intuitive approach to optimal investment decision * Optimal employment decision:* Optimal investment decision:* We work in terms of units of investment [?] MC(I)=1 and MB:* * * * * Simultaneous equations: * ** Mathematical approach to optimal investment decision * Choosing I is equivalent to choosing K' * Use the capital accumulation equation:* Firms have to choose 3 things to maximise I (N,N',K'):* Using the first order conditions:? Course Notes Page 33 * [?]

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