Question

Explain the basic investment theory on

a) plant and equipment

b) new housing start and

c) inventory.

The neoclassical theory (marginalist) of business investment.

What is Tobin’s Q?

Answer 1

Investment= Investment refers to real investment which adds to capital equipment. It leads to increase in the levels of income and production by increasing the production and purchase of capital goods. Investment includes new plant and equipment construction of public work, net foreign investment inventories and stock and shares.

a) Plant and equipment:- If a person or a company plans to buy equipments and plant it calls the investment or in other words it becomes their capital. Because it can be used in the production process to produce goods.

b) New Housing start:- House start is a very important factor in an economy which refer to new residential construction projects. So if new Housing starts, it becomes best investment project.

c) Inventory:- Inventory investment is a major part of GDP. In a certain year, in a country some goods are produced but these goods are not possible to sell in the same year or might be sold in a later year. So the difference between the production of goods and sales of goods in a given year is called inventory investment.

Inventory investment = production-sales

The neo classical theory says that investment is addition to the stock of capital in an economy which is determine by marginal product of capital (MPK).

MPK measures the use of additional unit of capital labour and technology.

The neo classical production theory known as cobb-dougals function.