Explain why a rise in investment should help to increase the rate of growth of the Uk economy. (9 marks)

An injection is defined as money that originates outside the circular flow of income and so will increase national income. The three types of injections are exports, government spending and investments. A multiplier effect is when an increase in spending leads to a larger than proportionate change in the national income.When firms increase investment in capital goods, they are injecting into the UK economy. Some of this money will be spent on technology and development of goods and services, and some on employees’ income, i.e. they may employ more people or raise wages. As a result of injections now outweighing withdrawals from the economy, a multiplier effect will be started.In this case, a multiplier effect is kick-started because of the initial rise in investments. a rise in investments will mean many households have additional income due to firms employing more people or paying people more. Some of this additional money in households will be spent on firms for example furniture shops as people use their extra income to buy things. Some of it will be saved in banks and such, but overall household consumption will have increased. When firms begin to receive more money from the households, they will most likely choose to invest at least some of it and therefore spend some of it on employees’ income. The result of this is that there would be more money in the circular flow of income transferring between both households and firms, meaning national income / gross national product will have increased, and so it can be seen that overall economic growth would be caused.Economic growth is also felt due to the increase in productivity that would be caused by firms investing more. As well as on employees’ wages, they would invest in technology and development, meaning goods/ services can be provided more efficiently and therefore the productivity is increased of the firm. This can be seen as, on the graph below, the PPF shifting to the right.