Page 123 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes In investment function, it may shift upward due to the following reasons:
A fall in the rate of interest
An increase in MEC
Improved sales prospect

Expectations of decreased costs in the future
A rise in profits which can be used to finance investment.
In Figure 6.10, there is an upward shift of the investment function from I to I . The consumption
1
function remains unchanged. Consequently the aggregate expenditure functions shift by the
same amount from E to E . In the converse case, the investment function would have shifted
1
downward.

Case Study Investment Spending in China: Reap What You Sow

espite falling exports, China's economic growth has remained relatively strong
this year thanks to a surge in investment sparked by the government's stimulus
Dmeasures. Official data show that fixed-asset investment leapt by an astonishing
39% in the year to May, or by a record 49% in real terms. Sowing more today should yield
a bigger harvest tomorrow, but how wisely is this capital being used?
Official figures almost certainly overstate the size of the spending boom: local bureaucrats
may well be exaggerating investment in order to impress their masters in Beijing. More
important, the government's figures misleadingly include land purchases and mergers
and acquisitions. But even if measured on a national-accounts basis, like GDP, investment
is probably growing at a still-impressive real annual rate of around 20%. This year China's
domestic investment in dollar terms is likely to exceed that in America (see graph below).

There is widespread concern that this investment boom is adding to China's excess capacity.
Investment amounted to 44% of GDP last year (compared with 18% in America), which
many economists reckon was already too much. Worse still, as well as forcing state firms
to invest, the government is directing state-owned banks to lend more, despite falling
corporate profits. Many of those loans could turn sour. Like Japan in the 1980s, it is argued,
an artificially low cost of capital causes chronic overinvestment and falling returns. If so,
Contd...

118 LOVELY PROFESSIONAL UNIVERSITY