Why is investment volatile in nature
Dear Student,
The key lies in the nature of the investment process. Investment decisions often require long lead times, and their consequences are as durable as the investment goods themselves.
For example, the case of commercial construction, which declined in the late eighties. Office buildings planned during a period of strong demand for space may be completed during a recession, when demand even for existing space is weak. Such a shift in fortunes causes a decline in investment for two reasons. First, the need for office space has declined. Second, the amount of office space has risen, so that subsequent investment must fall not only to keep pace with slower demand, but also to eliminate the "overhang" of empty space. Economists call this magnification of the impact of declines in product demand the "accelerator" model of investment. As industrial production shifts away from such strongly cyclical industries as manufacturing, the strength of cycles in business fixed investment may weaken. This moderating process is also likely to be helped by the shift toward less durable investments requiring shorter planning and construction periods, such as computers.
Regards
The key lies in the nature of the investment process. Investment decisions often require long lead times, and their consequences are as durable as the investment goods themselves.
For example, the case of commercial construction, which declined in the late eighties. Office buildings planned during a period of strong demand for space may be completed during a recession, when demand even for existing space is weak. Such a shift in fortunes causes a decline in investment for two reasons. First, the need for office space has declined. Second, the amount of office space has risen, so that subsequent investment must fall not only to keep pace with slower demand, but also to eliminate the "overhang" of empty space. Economists call this magnification of the impact of declines in product demand the "accelerator" model of investment. As industrial production shifts away from such strongly cyclical industries as manufacturing, the strength of cycles in business fixed investment may weaken. This moderating process is also likely to be helped by the shift toward less durable investments requiring shorter planning and construction periods, such as computers.
Regards