Definition and measurement The decision to invest Investments and demand of goods and services
Macroeconomics - Licence 1 Economie Gestion Chapter 3: Investment
Rémi Bazillier 1 1
[email protected] http://remi.bazillier.free.fr Université d’Orléans
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Plan 1
Definition and measurement Definition
2
The decision to invest Net present value (NPV) Internal rate of return Investment function
3
Investments and demand of goods and services The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Definition
Definition
“Purchases of new houses and apartments by people, and purchases of new capital goods (machines and plants) by firms”.
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Definition
Growth rate of investment and GDP in France
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Definition
Investment rate
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Definition
Investment by institutional sector
Percentage Non financial firms and individual firms Households Public administration Other sectors Source: INSEE
52.4 27.7 16.5 3.4
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Definition
Investment by sector
Sector Agriculture Industry (including intermediate goods) Construction industry Services (Including real estate) Other Source: INSEE
Rémi Bazillier
Percentage 2.7 15.1 (5.3) 1.6 66.1 (32.7) 14.7
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Net present value (NPV) Internal rate of return Investment function
The net present value (NPV)
Discounting Capitalization Actuarial calculation
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Net present value (NPV) Internal rate of return Investment function
Actuarial calculations
Sn = S0 (1 + i)n Sn ↔ S0 = (1 + i)n
(1) (2)
Present value: PV =
n X t=1
Rémi Bazillier
Rt (1 + i)t
Chapter 3: Investment
(3)
Definition and measurement The decision to invest Investments and demand of goods and services
Net present value (NPV) Internal rate of return Investment function
Net present value
Internal financing: Investment if PV = P0 > C0 Debt financing: Investment if R1 > C0 (1 + i) ↔ R1 (1+i) = PV = P0 > C0
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Net present value (NPV) Internal rate of return Investment function
Internal rate of return
r= internal rate of return for which present value of net incomes = cost initial investment Investment if r ≥ i
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
Net present value (NPV) Internal rate of return Investment function
Investment function Investment depends primarily on two factors: Level of sales - increase in sales → increase production → may need to buy additional machines → increase investment The interest rate - If a firm needs to borrow to finance its investment: the higher is the interest rate, the less attractive is to borrow and thus invest
I = I(Y , i)
(4)
(+, −)
(5)
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
The accelerator effect The accelerator effect refers to a positive effect on private fixed investment of the growth of the market economy. The growth of private investment is higher than the growth of GDP.
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
A formulation of the accelerator effect
It+1 = k (Dt+1 − Pt ) + Ir ,t+1
(6)
with k the accelerator coefficient, Dt+1 the demand in t + 1, Pt the production in t and Ir ,t+1 the replacement investment.
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
Formulation of the accelerator effect
Source: Jalladeau, Joël (1993), Introduction à la macro-économie. Modélisation de base et redéploiements théoriques contemporains, Bruxelles, De Boeck-Wesmael, p. 64 Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
Empirical validation of the accelerator effect
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
A critical analysis of the accelerator effect
1
Two conditions Full employment of capital No brutal changes in production techniques
2
Flexibility of capital adjustments?
3
Rise and fall of consumption don’t have symmetric effects The accelerator effect is more complex:
4
Heterogeneous accelerator effect between sectors Influenced by prices evolutions
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
Production capacity usage rate
Sources : Ifo, Insee et Commission européenne, calculs Insee
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
Extensions
Acceleration effect and firms’ profits Acceleration effect and businessmen’s expectations The flexible accelerator effect
Rémi Bazillier
Chapter 3: Investment
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
The accelerator effect and businessmen expectations
It+1 = k .α(Dt+1 − Pt ) with α the expectation coefficient
Rémi Bazillier
Chapter 3: Investment
(7)
Definition and measurement The decision to invest Investments and demand of goods and services
The accelerator effect A formulation of the accelerator effect Empirical validation of the accelerator effect A critical analysis of the accelerator effect Extensions of the accelerator effect
The flexible accelerator effect
It+1 = βk (Dt+1 − Pt ) + Ir ,t+1 with βk , the flexible accelerator coefficient
Rémi Bazillier
Chapter 3: Investment
(8)
