An Introduction to Demand Management, Long-Run Growth and Global Economic Governance
Chapter 5: Investment, the IS Curve, and Product Market Equilibrium
Economists like to think about investment primarily in terms of enabling or enlarging future production, but that is not always the case. Investment by definition equals the amount of production that is not consumed and there is no reason why this should always be done with the aim of future production. Very visible, but unproductive investments include the pyramids, Stonehenge and the Eiffel Tower. Consumption has been deferred for religious reasons and to create symbols of (economic) power. This manner of investment is clearly exogenous and we will not attempt to explain it. So far, we have treated all investment as a completely exogenous variable. This is an unsatisfactory situation because investment is clearly influenced by economic variables and because, as discussed in the previous chapter, fluctuations in investment via the multiplier are an important determinant of the fluctuations in GPP that make up the Earth’s business cycle. In this chapter investment will become endogenous (so we are going to explain the level of investment in a theory represented by a model). There are many theories about investment (a selection is discussed in Section 5.3), but initially we narrow the range of explanations and analyse only how investment decisions are being influenced by the interest rate R.
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