Factors that Determine the Level of Investment of a Country

Factors that determine the level of investment of a country; An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time.

When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.

The act of investing has the goal of generating income and increasing value over time. An investment can refer to any mechanism used for generating future income.

This includes the purchase of bonds, stocks, or real estate property, among other examples. Additionally, purchasing a property that can be used to produce goods can be considered an investment. Some of the factors that influence the profitability of investment and thus influence its volume are as follows:

Factors that Determine the Level of Investment of a Country

Several factors that determine the level of investment in any country. Some of these factors are examined below.

1. The Rate of Interests

The Rate of Interests is perhaps one of the most important factors that determine the level of investment of a country.

Most investments are made with borrowed money for which the borrower must pay a market rate of interest.

Thus, the decision to invest or not depends on whether the expected rate of return on new investment is greater or less than the interest rate that must be paid on the amount to be borrowed to acquire these assets.

Marginal Efficiency of Capital and the Rate of Interest: The marginal efficiency of capital is the rate of returns on new investment. Sometimes, it is also referred to as “expected rate of return over cost” on new investment.

At equilibrium, marginal efficiency of capital and the rate of interest will be equal. This is because firm would continue to make new investments as long as the rate of return on the new investment is greater than the interest rates.

Since capital is also subject to diminishing returns, it is expected that the rate of return on new investments or alternatively the marginal efficiency of capital to fall as the stock of capital increases.

Read Also: 5 Factors Influencing Consumption

2. The Level of Income

Research studies have shown that the level of income might be a better inducement to investment than the interest rate. This is because increase in income will lead to increase in demand for goods and services.

Assured of the presence of a willing demand for their output, businessmen will undoubtedly be encouraged to increase their investment in order to cash on the potential increase in their profit level.

3. Changes in Income

This is the accelerator theory. According to this theory, investment is related to the change in national income. When income is increasing, it is necessary to invest in order to increase the capacity to produce consumption goods.

However, when income is falling, it may not even be necessary to replace old capital, as it wears out let alone to invest in new capital.

4. Expectations

Since present investments are usually made in expectation of future demand, the decision to invest depends on the hope about the future.

When a firm has a high optimism about the future, it can embark on increased investments presently and vice versa.

However, because of the uncertainty about the future, firms are usually very cautious about increasing the level of investment they made.

5. Population Growth

Rapid expansion in the size of population offers more markets for the goods

The investor, in expectation of a higher demand and greater profitability, would naturally like to make expansion in their plant and equipment and thus, undertake more new investments

The economics history of the modern advanced nation’s shows that the period of rapid population growth have also been the periods of massive outbursts in investment activity

 6. Government Policy

Tax forms a deduction from the income of the entrepreneurs and thus high rates of taxation reduce the amount received by the entrepreneurs, thereby reducing the expected profitability of investment

Higher rates of taxation, thus act as deterrent to investment, whereas low tax rates, or tax exemption, will provide an incentive for investment

Similarly, if the government gives increased subsidies to the new entrepreneurs and provide them other benefits, this might act as incentives for new investment.

Read Also: National Income Definition & Difference from Personal Income

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