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The research paper showcases the impact of investment on the economy as it is the most important factor determining the economic growth of the country (Moosa, 2016). In this context, the impact of investment on the economy of New Zealand has been analyzed with the help of relevant theories and model of investment. In the words of Kaldor (2015), the term investment in economic sense refers the purchasing power of goods and services which are not entirely consumed today.
However, it preserves for the future period as a wealth. According to Hermes & Lensink (2013), investment is directly connected to the economic growth of a country. With the increased amount of investment, the production level can be raised which would enhance the rise in GDP of an economy (Lewis, 2013). In this perspective, the impact of investment on the economy of New Zealand has revealed the positive result both in the sector of environmental and social.
The aim of this research study is to focus on investment and critically analyze the effect of investment on the economy of New Zealand.
The objectives of this research topic are:
To critically assessed the impacts of investment on the economy of New Zealand.
To analyze the issues faced by the investors during investment process in New Zealand.
H0: There is no impact of investment on the economy of New Zealand.
H1: There has a strong impact of investment on the economy of New Zealand.
In this chapter of the research topic, the impact of investment has been analyzed with the help of relevant theories and model related to the country of New Zealand. The theories and model help the researcher to obtain a clear and detailed knowledge on investment that further supports the investors to make appropriate decisions (Arrow & Kruz, 2013).
According to Dybvig & Warachka (2015), Tobin’s q theory indicates the economics theory related to the investment behavior in which the term q represents the ratio of the market value of the existing firm to the substitute cost of the physical assets of the firm. Apart from this, by following this theory, if the value of q is greater or less than 1, then the firm would increase or decrease the capital stock accordingly. In the words of Erickson & Whited (2012), the Tobin’s q theory has a direct link with the investment system to the asset markets. Furthermore, this theory is the modified version of the neoclassical theory.
Specifically, the theoretical framework of Tobin’s q reveals the relationship between the investment and stock market in which the investor can identify the appropriate time of investing on the share market. As stated by Eklund (2013), the investors want to invest more amount of money when the stock markets are in high position. This would lead to get more rate of return to the investors. On the contrary, in the words of Scharfenaker & dos Santos (2015), the above situation is reversed when the stock market is in low position. At this moment, the investors do not want to invest money in this situation as the rate of return is significantly low in this condition.
Figure 1: The relationship between the capital stock and investment
Source: (Eklund, 2013)
According to Kim, Kwak & Lee (2015), the higher value of q ratio represents the higher amount of share price which would ensure the more amount of investment in the economy. In this market situation, the investors acquire the profitable situation along with additional capital as the value of the capital is greater than the associated cost. The above figure depicts the fact that with the rise in price, the demand curve shifts outward. This incident would increase the level of investment in the economy (Scharfenaker & dos Santos, 2015). As a result, the increase in capital stock would lead to rise in the level of investment.
On the contrary, in the words of Dybvig & Warachka (2015), the lower value of q indicates the share market is in deem position in which the investors cannot interest to invest more amount of money in the economy. As a result, the demand of share decreases which would lead to decrease in the capital stock of the economy. Moreover, this has a bad impact on the investment of the economy. The level of investment diminished in this situation which is not desirable for an economy (Hermes & Lensink, 2013). The primary reason is that rate of return is not much significant in this context. Thus, this theory incurs the relationship between the capital stock and investment and impact of investment on the economy concerning the economic situation of the nation.
According to Davidson (2015), as per the Keynes theory of investment, the interest rate and return on capital are responsible factors to determine the investment of an economy. In addition, as per the Keynes investment theory, the investors make the decisions about the investment on the basis of real interest rate and marginal efficiency of capital (MEC) (Kates, 2016).
The theoretical framework of Keynes depicts the fact that the higher value of MEC from the rate of interest indicates the more amount of investment in the economy. On the contrary, in the words of Tily & Keynes (2016), by using higher amount of capital in the production procedure, the concerned MEC falls down continuously due to the theory of diminishing marginal productivity of capital. On the other hand, by following this process, the value of MEC is equal to the value of rate of interest which would ensure the negative investment in the economy.
Figure 2: The relationship between the Marginal Efficiency of Capital and the decision of Investment
Source: (Klein, 2016)
The above figure depicts the information that there is a negative relation between the MEC and the investment. The decrease in the amount of MEC would lead to the rise in value of investment (Ghosh & Ghosh, 2013). According to Davidson (2015), the main reason behind the fact is that at the initial stage, the investment provides the higher amount of rate of return which is reversed later. At this stage, the investment is less productive and it acquires lower rate of returns on the economy.
However, as per this theory, the investment level not only depends on the expected rate of returns but also the cost of the capital which is known as the rate of interest (Kapoor & Lee, 2013). In this context, the investors choose the situation for investment purpose when the rate of interest or cost of capital is equal to the value of MEC. This is the most preferred condition for investment in the economy as the rate of return is higher in this context. Now, the fall in rate of interest would stimulate the economy by increasing the amount of investment (Malkiel, 2015). This would help to increase the national income in the economy.
Thus, it also showcases the fact that there is also a negative relation between the rate of interest and the level of investment. According to the above figure, it can be deduced that due to the higher amount of MEC, the MEC curve shifts to the rightward which would lead to increase the level of investment. On the contrary, in the situation of higher rate of interest, the level of investment falls down this is not desirable for an economy (Balassa, 2013). Thus, with the help of this theory the impact of investment and its relation with the rate of interest or cost of capital and the MEC has been analyzed properly.
In general, the neoclassical investment model examines the advantage and costs of the firms with respect to the owning capital with the help of Cobb-Douglas production function. According to Canto, Joines & Laffer (2014), this investment model depicts the relationship between the investment level in terms of addition of the stock of capital to the interest rate and marginal product of capital.
The Cobb-Douglas production function can be written as Y= A K? L1-?
In which Y represents the value of output, K refers to capital, L represents labour. Moreover, A is the parameter which represents the technology and ? is the parameter which indicates the share of capital with respect to output (Hansen & Ohanian, 2016). The marginal product of capital is obtained through the process of differentiating production function related to the labour. Thus, the final value of MPK= ? Y/K.
Now, to maximize the level of profits, the tendency of the firm is to equate with the rental price of capital to the marginal product of capital (Arrow & Kruz, 2013).
By following the calculation, the desired amount of stock of capital is K= ? P/r Yt
The above equation inferred the fact that the higher value of rental cost of capital lowers the amount of desired capital stock of the firm. On the other hand, in the words of Erickson & Whited (2012), the reverse is happened when the rental cost of the capital is lower. It would increase the amount of capital stock of the firm. Moreover, the greater amount of desired capital stock leads to the higher value of expected output.
Apart from this, as commented by Tily & Keynes (2016), the changes in the capital stock of the economy is known as net investment which mainly depends on the change of the amount of cost of capital and marginal product of capital. The difference between these above-concerned factors determines the investment level. In this perspective, if the value of marginal product of capital is greater than the cost of the capital, firms want to investment more amount of money in the economy (Kapoor & Lee, 2013).
The main reason behind the fact is that according to the firm’s view, it is the most profitable situation for investment purpose in the economy. On the contrary, as opined by Canto, Joines & Laffer (2014), if the amount of marginal product of capital is lower than the cost of the capital, then the firm would shrink their capital stock and the level of investment falls down.
Apart from this, the technological innovation procedure helps to increase the parameter of the production function A. With the rise in A, the marginal product of capital raises and it helps to increase the amount of capital goods with respect to given interest rate (Davidson, 2015). Moreover, the amount of business investment increases when the rate of interest falls. In the words of Balassa (2013), the fall in interest rate reduces the amount of cost of the capital. This would lead to ensure that the owning capital is more profitable in this situation. However, the increase in marginal product of capital would lead to shift the investment curve rightward (Eklund, 2013). Thus, the neo classical model of investment explains the relationship between the interest rate or cost of capital and marginal product of capital with the investment through the Cobb-Douglas production function.
The above analysis is based on the identification of the nature of investment with the different factors. In this procedure, the relevant theories and model of investment helps to analyze the behavior of investment in different situation. With the help of Tobin’s q theory, the profitable situation of investment in the stock market can be identified as q represents the share price of the market. Thus, by depending on the value of q specifically greater than or less than value, the preferred situation of investment can be judged.
Furthermore, with the help of theoretical framework of Keynesian theory, the relationship between the interest rate and marginal efficiency of capital to the investment can be justified. According to this theory, the fall in rate of interest leads to decrease the level of investment in the economy. Thus, there is a negative relation between the rate of interest and investment. Moreover, the rise in MEC and upward shift of the curve helps to increase the amount of investment. Thus, this is the preferred situation for investment in the market for the investors. The investors find the situation that the cost of capital or rate of interest is low in this scenario. As a result, the investors can be able to earn higher amount of profit from the market.
On the other hand, in this perspective, the neo classical model of investment helps to identify the nature of investment and the preferred situation of investment in the market. In addition, this model is explained with the help of the Cobb-Douglas production function. As per this theory, the lowers the amount of cost of capital, the investor can earn higher amount of profit from the market. Thus, there is a negative relation between the cost of the capital and investment.
However, with the increased amount of marginal product of capital, the investors can be able to earn more amount of profit and they want to invest more in the market. Specifically, this theory explains the preferred situation of investment for investors. According to the theoretical framework of this model, when the amount of the cost of capital is lower than the marginal product of capital, then the investors can be able to earn higher amount of profit. Thus, there is a positive relation between the marginal product of capital and investment.
Thus, after justifying all these theories and model associated with the investment, the overall result signifies that there exists a positive relationship between the marginal product of capital or MEC and negative relationship between the cost of capital or the rate of interest.
By referring the above analysis, it can be inferred that investment has a direct impact on the economy. It is an important factor which determines the economic growth of the capital of a nation. The level of investment in a nation describes the health of the economy by which the stagnation condition or further growth of the economy can be justified. In this perspective, the above literature review helps to find the nature of investment and the preferred situation of investment for investors. Moreover, in this context, the relationship between the factors such as rate of interest or cost of the capital, MEC and marginal product of capital with the investment can be justified properly. In this research paper, the main objective is to identify the impact of investment in the economy of New Zealand. The overall analysis gives the result that there is a strong impact of investment in the economy. It determines the growth of the economy and boost up the share price of the market in the depression situation. Moreover, the investors also identify the preferred situation and they motivated to invest more amount of money in the market. Thus, the null hypothesis is rejected and alternative hypothesis is accepted which states that there is a positive and strong impact of investment in the economy.
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