07 Apr B. Problems of attracting foreign investment and economic development of Ukraine // On privatization: Gos.
B. Problems of attracting foreign investment and economic development of Ukraine // On privatization: Gos.
The source of business profit from capital is the return, the source of profit of economic objects from capital is the interest paid. Consecutive short-term investments (annual) increase the total capital of the business in the long run.
The determining factor in the emergence of long-term demand for capital is the long-term behavior of enterprises seeking to obtain a stable flow of profits. Between short- and long-term demand of enterprises for capital the same differences as between short- and long-term supply of goods by enterprises.
Both types of demand for capital depend on the behavior of firms and enterprises in the short and long term, respectively.
Short-term demand for capital arises when the company moves from one capacity option to another by investing in production assets. Long-term demand is generated by the general trend of changing production capacity in order to make a profit.
In essence, short-term demand is the need for additional investment, capital growth through investment, and long-term – is the demand for total production capital for profit.
Given the specific form of capital in the form of financial resources in the short term, the demand for capital and supply of investment funds interact in the financial market (Fig. 1).
Fig. 1. Continuous curve of capital demand formation.
The intersection of the curve of short-term supply of savings of farms for investing SS with the curve of demand for capital by enterprises of DD determines the equilibrium level of interest i0.
At this percentage, the amount of funds that farms keep in the form of deposits in financial structures, usually equal to the amount of investment that the entrepreneur wants to buy to make a profit.
As a result of providing savings of farms to the entrepreneur in the form of investment funds in the amount of K0, the annual profit of the entrepreneur will be determined by the area i0al, and the annual profit of farms – the area of the rectangle 0i0lK0. Thus the businessman will realize those projects from which return P> i0.
Theoretically, the curve of market demand for capital is a curve of generated demand by enterprises, ie the aggregate curve of marginal return on capital invested in order to make a profit as a whole.
In practice, this is the dependence of the effectiveness of investment projects, which in principle can be implemented by enterprises at the existing level of equipment and technology, on the value of total investment in profit.
In fig. 2 illustrates the principle of construction of this dependence. To do this, potential projects of enterprises (1 A, 2B, 3B, etc.) are ranked in descending order of return – P1, P2, …, determine the amount of total investment for one project: K1 = C1, two projects: K2 = C1 + C2, three projects: K3 = C1 + C2 + C3, etc. Here C1, C2, … —the cost of the project of the first, second, etc. If an enterprise has more than one investment project option, such options should be built as technically independent. This means that projects can be implemented in any sequence and in any quantity, depending only on the amount of financial resources involved.
It is easy to see that when the demand in the investment market is formed under the influence of the demand of a large number of enterprises with a small influence of each individual enterprise, the curve of total demand for capital of DD becomes almost continuous.
Fig. 2. Step curve of capital demand formation.
All other things being equal (price level, etc.), the appearance of the short-run supply curve SS significantly depends on the amount of “free” money M in farms in the current period in the total savings in the long run.
As the amount of “free” money in farms increases, the supply of savings increases – the SS curve becomes flatter, money is saved even at a lower percentage. With an increase in the total amount of accumulated savings (short-term supply of savings decreases), other things being equal, the curve shifts upward (Fig. 3).
With the same total amount of accumulated savings, the size of market interest in the short term depends on the amount of “free” money in households and the population. This fact is widely used by the Central Bank to regulate interest rates.
Fig. 3. The influence of the amount of “free” money on the supply of savings.
The dependence of the minimum percentage on the total accumulation of farms is a long-term supply of capital SS. its interaction with the curve of demand for capital by enterprises is shown in Fig. four.
Consider this interaction in more detail. Suppose the total amount of physical capital of enterprises at the beginning of the short-term period is equal to K0, and the market percentage – i0. During the short-term period (year) a certain part of physical capital wears out and is subject to replacement. Relevant funds are “returned” by the economy as profit in two ways: in the form of loan repayment (for borrowed capital investments) and in the form of the amount of depreciation (from equity). Since the market percentage i0 significantly exceeds the minimum percentage of changes with the corresponding amount of capital K0, in the period under review, according to the short-run supply curve, SS farms will offer additional investment funds.
Fig. 4. The interaction of demand for capital and supply of capital.
Due to the interaction of supply and demand, the market interest rate will fall to L, and the net increase in capital of the enterprise will be AK1. Together with the reimbursable part of the physical capital, the volume of gross investment of farms in profit will be equal to; = a1 + AK1, and total capital will increase to K1 In the next short-term period, the process of investing in profit is repeated, as a result of which due to gross investment in2 percent will decrease to i2, capital will increase to K2 , etc.
Theoretically, with a constant level of technology, if the demand curve for capital does not change over time, it is possible to achieve long-term equilibrium at the point / at which the market percentage will be equal to the minimum percentage of changes in capital Kd. In this case, the capital increase will stop, and the annual gross investment will only recoup the outgoing physical capital.
Thus, the interaction of capital demand with capital supply reproduces in the long run the mechanisms operating in the capital factor market. At the same time, the interaction of investment demand with the supply of investment funds in the short term reproduces the mechanisms of the credit market. The investment fund market is a way of existence of the capital market. In fig. 26 both markets are connected. So despite that
that the capital factor has a unit of measurement of stock (UAH), the amount of annual gross investment; has a unit of flow measurement (UAH / year).
The considered process reflects only the general direction, the general scheme of capital formation. According to this scheme, the market interest rate should decrease with increasing capital. However, this is not happening in Ukraine’s economy. In real conditions, under the influence of scientific and technological progress due to the emergence of new equipment and technologies, the emergence of new types of consumer products and services, the demand for capital increases over time – the demand curve shifts to the right up in each short period. As a result, the market share not only does not decrease, but often increases.
Scientific and technological progress contributes not only to economic growth and a fairly stable percentage. It also causes a high risk of investing in some investment projects or enterprises in general. Millions of farms, in principle, cannot assess the risk of investing in various projects. It is highly professional financial intermediaries – banks, funds, brokers, accumulating savings and placing them in the form of loans or purchases of corporate bonds, designed to assess the risk of investment.
The market for debt funds is also significantly affected by expectations of inflation (Fig. 5).
Fig. 5. The impact of inflation on market interest rates.
Due to the devaluation of money in the event of inflation, it is much easier for the borrower to repay the debt, because he actually repays the lower real value than the one he borrowed. Under inflation, entrepreneurs, hoping for higher prices for their products in the future, increase the demand for capital acquired at current prices – the demand curve in this case shifts upward.
Financial intermediaries (and economies), waiting for inflation and realizing that the return will be less real than borrowed, agree to lend compare and contrast essay now buy at a higher interest rate and reduce supply – the supply curve shifts to the left up. As a result, the market interest rate increases. It is generally believed that the nominal (market) percentage exceeds the real percentage; at the rate of inflation p \ ie and – and + p \.
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