UK Economy in Focus - Investment Spending

This revision video looks at factors influencing business capital investment in the UK economy and the investment gap between the UK and many other countries.

Investment spending is the most volatile component of aggregate demand

AD = C+I+G+ (X-M)

In 2021:

I = £383 billion

GDP = £2199 billion

Therefore, I = 17.4% of GDP

Summary of key factors influencing the level of business investment

• Actual & expected demand for goods & services – link here with the accelerator effect
• Expected profits and business taxes including corporation tax
• Interest rates + availability of business finance
• Business confidence (animal spirits)
• Government priorities for infrastructure spending

Importance of investment for an economy such as the UK

• Improves productivity – workers have advanced technology to use
• Investment can create jobs – someone must manufacture the capital goods (such as robots), infrastructure projects create jobs
• Investment needed for businesses to remain internationally competitive – other countries will be investing at the same time
• Investment can control inflation – creates additional supply which helps keep prices low – investment can then reduce supply shortages
• Investment stimulates the economy and can increase growth (LRAS)
• Investment can help meet the UK’s environmental targets – e-vehicles, charging stations, green energy capacity

Investment ratio for a selection of countries:

(Source: World Bank, Gross I as a % of GDP in 2020):

• China: 44%
• South Korea: 33%
• United Kingdom: 17%
• Vietnam: 27%
• Greece: 15%
• Bangladesh: 31%