GROSS PRIVATE DOMESTIC INVESTMENT
Investment spending that does not depend on the level of GDP.
= Investment spending that increases or decreases as GDP increases of decreases
THREE CATEGORIES OF INVESTMENT SPENDING
PLANT AND EQUIPMENT SPENDING
Influenced by state of the economy and by level of interest rates
NEW RESIDENTIAL CONSTRUCTION
Influenced by level of interest rates
CHANGE IN INVENTORIES
The desired change in inventories does not necessarily equal the actual change in inventories.
The level of inventory cannot be completely determined by a business firm
Consumers may buy more or less than the firm expected.
DESIRED INVESTMENT SPENDING
= the amount business wish to spend on new plant and equipment
+ the amount contractors wish to spend on new residential construction
+ the amount that businesses wish to spend to add to their stock of inventory
ACTUAL INVESTMENT SPENDING
Desired investment will not necessarily equal actual investment spending.
Businesses cannot necessarily achieve their desired change in inventories. PLOT INVESTMENT SPENDING VERSUS GDP
Plot desired investment spending on the vertical axis.
Plot the level of GDP on the horizontal axis.
If all desired investment spending is autonomous, the investment function will be horizontal and have a slope of zero.
CHANGES IN AUTONOMOUS INVESTMENT
Factors that increase the level of autonomous investment spending
Increases in Expected Profits
Decreases in interest rates
Technological change and new products
If autonomous investment spending increases, the investment function shifts upward, parallel to itself.
INDUCED INVESTMENT SPENDING
Investment spending that is induced by increases in the level of G