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Investment and Firm Savings

The agent class that is least developed within IFs as a class with behavioral relationships, and that instead relies on aggregated relationships is the firm (as discussed around the production function). With respect to investment also, the firm is represented in aggregate fashion. The equation below indicates that the core of the gross capital formation (IGCF) calculation each year is potential GDP (GDPPOT) times an investment rate (IRA) from the initial year. There are two factors that modify that core. The first is an investment rate multiplier (IRAMul) that, like the one on consumption, drives down investment when rates rise. The second is one that ties investment to a smoothed version of the SAVINGS variable. As savings rise, normally investment does also, and IFs uses a moving average to smooth savings in this relationship.

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Gross capital formation, although highly correlated with investment (I) is not equal to it. Investment also contains changes in stocks. It is that addition of delta stocks that brings the entire representation of the goods and services market in proper relationship with the financial representations of flows among agent classes.

Even is the basic behavior of the firm is simplified, its accounts must still balance. Firm savings is equal to firm income minus net transfers to households and government. In addition, there are positive net transfers to the rest of the world in the form of outward FDI flows (XFDIFOUT), portfolio flows (XPORTFOUT), and subscriptions to the World Bank.

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