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Florida Institute of Technology
BUS1301

Chapter 6: Business Investment Sector Of The GDP
Includes generally three types of firms; Proprietorship, Partnership, and Corporations

Three Types of Business Firms
I
...
You are the CEO and/or BOSS!
2
...
Burden of running the company falls ALL on YOU(the proprietor)
2
...
Harder to raise money and capital

II
...
g Law firms, accounting firms, family businesses, restaurants, etc
● Advantages
1
...
Work and responsibility could be divided or delegated
● Disadvantages
1
...
All partners are liable for all the cost and debt incurred by the
business or company

*If the business is sued, or partner absconds with funds, other
partners are held personally liable
III
...
g selling stocks
● Most are PRIVATELY held/owned (info based on US economy)
● Advantages
1
...
Potential Perpetual life
3
...
Can sell companies stocks and assets to raise money
● Disadvantages
1
...
Needs a lawyer or legal team
3
...

II
...


Limited Partnerships
S Corporations
Limited Liability Proprietorships (LLP)

● Advantages
1
...
Taxed solely on the individual’s profit levels
3
...
Common stock
- Gives voting rights
2
...
Recessions are touched off by the declines in investment
II
...
Old and obsolete capital must be replaced (depreciation)
II
...

Interest rates fall during recession so cost of borrowing is lower
(They want to draw investments to help economic recovery)
Residential Construction
● Replacing and/or adding new housing
● Fluctuates with the year to year interest rate
- People found that the amount of money they own in home mortgages was
greater than the value of their homes
*This is called being “underwater”

How Do People's Savings Become Investments?
1
...
Businesses take the savings to invest in new plants, add inventory and
equipment
3
...
Sales Outlook
2
...
Interest Rate
4
...
12

so Interest paid must be $120

Expected Rate of Profit (ERP)
● The rate that usually investor used to compare with the Interest rate to determine
whether to invest
● Equation for ERP

𝐸𝑅𝑃

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
𝑀𝑜𝑛𝑒𝑦 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑

● Example: What’s the ERP on a $10,000 investment if you expect to make a profit
of $1,650?
Answer:

𝐸𝑅𝑃

,

0
...
5%

Interest Rate And ERP
● Usually, you won't invest if the interest rate is higher than the ERP
● In general, the lower the interest rate, the more businesses will borrow money
and invest
*At best, lower compared to the ERP
● They need to compare the ERP with the interest rate even with their own money
- Spending in investments has opportunity costs
- Foregone alternative would be putting money in a safe money market fund
- ERP must be HIGHER than the opportunity cost( potential interest)
Thoughtful Question

Question: Who are corporate leaders and executives loyal to?
Answer: Their owners
Context:
- If a corporation doesn;’t maximize profit, then they disloyal to their owners
- If shifting jobs overseas will increase profit, then they WILL DO IT!

Quick Review of GDP
Gross Domestic Product (GDP)
●
●

It is a nation’s entire expenditures on all the final goods and services produced during
the specific year at the market price
These are four main sectors of GDP:
1
...
Investment
3
...
Net Export



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