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1 1 (November 14, 2019)

handle is hein.crs/govbbqr0001 and id is 1 raw text is: Updated November 14, 2019 Introduction to the U.S. Economy: Business Investment Whais Busiess investment? Business investment is spending by private businesses and nonprofits on long-lasting assets, also known as physical capital, that assist in the production of goods and services. Physical capital is generally grouped into three categories: equipment (e.g., machinery or computers), structures (e.g., offices or warehouses), and intellectual property (e.g., software development or research and development). Through investment, businesses can build up their stock of physical capital, which increases their capacity to produce goods and services. For example, when a restaurant purchases an additional grill, it increases its capacity to prepare food at a given time. However, physical capital tends to become less productive over time due to wear and tear and eventually must be replaced as it breaks down. This process is referred to as depreciation. For a firm to continually increase its stock of physical capital, and therefore its productive capacity, it must invest in new physical capital faster than its current physical capital is depreciating. The same goes for the economy as a whole- for the economy's stock of physical capital to increase, the investment rate must exceed the rate at which physical capital depreciates. iConsiderations Business investment is of significant interest to economists because it can affect the economy's short-term and long- term growth. In the short term, an increase in business investment directly increases the contemporary level of gross domestic product (GDP) because business investment is included in GDP. Similarly, a decrease in business investment will decrease GDP. Business investment is one of the more volatile components of GDP and tends to fluctuate significantly from quarter to quarter. In the long term, business investment, specifically the size of the capital stock, can impact the economy's long-term growth. A higher physical capital stock increases the economy's overall productive capacity, allowing more goods and services to be produced with the same level of labor and other resources. Alternatively, a lower physical capital stock reduces the economy's productive capacity, all else equal. In the long term, economic growth generally depends on growth in the economy's productive capacity, rather than swings in supply and demand. Faster economic growth generally translates into faster income growth and improved living standards. For additional discussion of the long-term drivers of economic growth, refer to CRS In Focus IF10557, Introduction to U.S. Economy: Productivity, by Jeffrey M. Stupak. Drivers,- ofBunssnvtm t The main determinants of business investment are broader economic conditions, business confidence and expectations, and long-term interest rates. As discussed earlier, business investment can affect the economy, but changes in the economy also affect business investment. As shown in Figure 1, following the beginning of the 2007-2009 recession, business investment began to decrease sharply. As a recession occurs, businesses tend to see a decline in demand for their products, which leads them to reduce investment spending. Alternatively, during a healthy economic expansion, businesses tend to see rising demand for their products, which leads them to increase investment in order to increase production to accommodate the increased demand. As such, the business cycle is one of the largest drivers of business investment. For more information regarding the business cycle, refer to CRS In Focus IF1041 1, Introduction to U.S. Economy: The Business Cycle and Growth, by Jeffrey M. Stupak. Figure I. Recent Business Investment Trends 2005-2019 Source: Bureau of Economic Analysis. Notes: The investment rate is measured as the year-over-year change in real business investment. Grey bar indicates recession. Business confidence and future expectations for the economy are also expected to influence business investment. If business owners expect rising sales and improving economic conditions, they are more likely to invest in their businesses because they anticipate increased demand for their goods and services. Alternatively, declining confidence in the economy will likely result in declining business investment. Business confidence and future expectations can be unpredictable and difficult to influence through public policy. Business investment is typically financed through credit markets. As such, interest rates influence business - ........... gm 10M ILI

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