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Price, Income and Demand: Classifications and determinants of investments

Updated on May 28, 2016

Investment is an economic procedure in which an economic person mobilizes financial resources to create technical capital. The investments can be classified as follows:

Investments in production: enterprises mobilize financial assets into additional purchase or innovation of machines, equipment’s, construction of workshops and further increasing production capability.

Investments in welfares comprise of construction of such infrastructure projects as roads and highways, seaports, schools, hospitals, etc.

The majority of housing investments are made by households.

Nowadays, there are several non-material investments. They are expenditures on training, research and development (R&D), marketing, etc.

Generally, developed countries attach great importance to R&D. Based on 1986 statistic data, the US invested US$ 177.4 billion in R&D; Japan US$ 54.6; Germany US$ 25 billion and France US$ 16.5 billion. Therefore, there are a great number of patents and inventions in those nations. For example, in 1986, there are 322,455 inventions in Japan; 22,141 in the US; 77,418 in Germany and 57,210 in France. In France, non-material investments are constituted nearly half the size of material investments (in machinery and workshops).

Investments have a direct impact on output, employment, enabling the enterprise in particular, the country in general to enhance their production capability.

Economists generalize determinants of investments into 2 categories, namely demand and profit. An image is coined up: investments are pulled by demand and pushed by profit. However, to have a clear view on this issue, there are 3 major factors as follows:

  1. Revenue:

An investment raises the company’s revenue when that investment allows the company to sell more of its products. Therefore, investment level depends either on the outcomes of productions and trade activities or the general situation of the economy (in prosperity or in recession)

  1. Investment costs

Investment costs are more financially complicated than other types of normal costs as it lasts over a long period of years. To have capitals for investments, enterprises have to be either financially self-supplied or seeking loans from external sources (issuing bills, bank loans, etc.)

  1. Expectations

Investments are said to be a gamble on the future. That a small business places a large amount of capital on investment is to expect for and believe in the business efficiency. In other words, what they get in the future will be much greater than at the present. However, the economy situation is fluctuating with lots of risks likely to occur. Therefore, the decisions of investments depend partially on their expectation of what will happen in the future.

Taking account of the entire panorama of the economy during the years, it will be found that investment is characterized by instability. This makes the economic development unstable.

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