IGCSE Economics Paper-2: Specimen Questions with Answers 75 - 75 of 100

Passage

“The private sector, this includes reports such a corporate social responsibility reports, responsibility reports or environmental reports. For the public sector, this includes reports such as sustainability reports/plans, state of environment (SOE) reports, or strategic plans.”

Question 75 (4 of 5 Based on Passage)

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Short Answer▾

What is the importance of investment spending?

Explanation

Business sector makes expenditure on final goods and services or gross domestic product on purchase of capital goods.

Investment Expenditures Have a Fundamental Role in Macro

Economic activity affects both the short run and long run growth of the economy. Investment expenditure is one of the four expenditures on GDP the other three are:

  • Consumption expenditure
  • Government purchases
  • Net exports

Investment expenditures are 10 to 15 percent of annual GDP. These expenditures purchase capital goods that increase the long run production and promote economic growth. However, the investment spending by the government is unstable and volatile in the short run and causes instability in the business cycle.

  • Business cycle: Investment spending is a key factor in the short run macroeconomic analysis. Business cycles are the difficulties of economic activity. In the business cycle it is observed that first the economy expands for some period, then it contracts and eventually the economy expands again.
  • Economic growth: Investment expenditures also have a profound impact on the long-run growth of the economy. Using an economy՚s GDP to investment spending on capital goods indicates that more capital goods are produce in the economy.
  • Circular flow: The circular flow model depicts the role that investment spending has on macro economy. It captures the circular movement of –
    • Production
    • Consumption
    • Income
    • Factor payments between producers and consumers.

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