ABSTRACT
This chapter explains how profits affect investment; how investment affects the rest of the economy; and why there is a time lag between investment and profit. It also explains how investment has behaved in the long run and over the cycle; and how profit has behaved over the long run and over the cycle. The chapter discusses both new net investment and replacement investment. It furnishes a very powerful clue to the behavior of the economy: movements in the economy as a whole are controlled by investment, but investment is based on the outlook for profit. The chapter shows that investment plays a vital role in the business cycle because it rises rapidly in most of the expansion and falls rapidly in most of a recession. In every business expansion, each business increases its inventories because it is optimistic that it will need more supplies of every kind.
