Welcome back my friends, before we move on to another lesson, let's make a brief summary about what we have seen so far, there is no need to rush. Microeconomics is always the same, but let's get back a little bit to not get confused, and to stay put to say exactly where we are, what we have discussed: one, GDP, let's not forget. What's GDP, Gross Domestic Product, everything you manufacture, not just manufacture but service, within the boundaries of a country, that's my GDP. This is important, it is much more important to know that GDP stands for income. Remember, I cut your hair, charged 10, Reais or $10. Whatever it is. How much was GDP? $10. How much is my income? $10, so if you want to increase the wealth being, of a population of a country, your GDP needs to rise, that's pretty much straight forward. How can I raise? We will see later on, with some fiscal policies, with some monetary policy, something that, we have not seen yet. Then we open our GDP, I understand GDP, is my gross domestic product, it stands for my income, but what part of my GDP? First, consumption, household consumption, family consumption, and then I ask, your family decides to consume more because of what? Well, my family decides to consume more, if we get more money, yes, if you get more or higher income, exactly, you see how economic is easy. It's just sometimes we block our mind, don't block your mind it's easy, it's just good sense. You consume more, because you have more money, you consume more because, you have higher income. A hundred percent, no, eventually you consume 68-70 percent. What does 68-70 percent, that boring coefficient that we said, marginal propensity to consume, but if I'm unemployed, what I have to do as you consume, you have to sell, some of your assets, you borrow money, you have to consume, so consumption depends not only on your income, part of your income, but also sell of assets. Now, we want to move forward, and to discuss the second variable, that makes part of my GDP. That's what we call investment, or private investment, or to make matters worse what we call gross capital formation, or if you want to move, let's say corporate investment. Please look at me. I'm saying gross capital formation, corporate investment. Do not confuse with investment, in the financial market, we will discuss that, but this investment is not investment in stock market, in corporate bonds, nothing to do with investment in highways, in productive capacity, all of this stuff. Another question? What do you think investment, in gross capital formation depends on? What could lead, let's say a CEO, a CFO, an entrepreneur to invest more? I know he's very happy, he has money, no, but let's focus on economics. For example, if a government bond; numerical, let's say, a government bond of three years maturity, now eventually is paying five percent per annum yield. Would you be willing, to make investment in gross capital formation that yields less than five percent? What did I say? Sorry, I'm a little bit lost here. Are you telling me to tag along with you, to build up an hydroplane, let's say in Amazon, to get four percent return? Yes, but I can get five percent return, just by US government bond, yes, sorry but no thanks, I would rather buy government bonds. What I want to tell you. Do you understand now how interest rate influence your gross capital formation. The higher the interest the government pays in his bonds, the less interest you'll be willing to invest in gross capital formation. Now you understand, if the government, or the Central Bank, we will see later on, if the Central Bank wants to cool down a bit the economy, they raise interest rates for investment to decrease, investment decrease, GDP decrease, GDP's income is lower, consumption is lower. You understand why high interest rate, cools down the economy? If you want to speed up, or make the economy more, let's say, attractive in a way, you just lower interest rate. For example, now, I was not really willing to invest, in that hydroplane because just have a return of four percent, yes, four percent is good or bad? I don't know, I just have to check the risk-free rate. If a government bond is paying, let's say, half percent, well four percent definitely is more than 0.5 percent. Now, I would be much more willing to invest in gross capital formation. That's the basic principle, you have to put behind, investment is dependent on interest rates. That's what we call real interest rates, which is nominal interest rate minus inflation. We always assume, that government bond is considered to be risk-free, obviously. That's what we've I know that investment in gross capital formation, as we've said. It just depends on my real interest rates. If an interest rate is higher, I would rather stay at home buy government bonds. If interest rate is lower, I would rather run some risk, and investing gross capital formation. Did you figure out or did you realize, that I took care, and say interest rate is a necessary condition, but not sufficient to boost gross capital formation? Maybe yes, maybe not. Let's remember what happened, during the pandemics. During the pandemics, all around the world, the interest rate was very low, even negative in Europe for example. Why investment did not take place? No, we have seen many economic moments when interest rates were low, but investment did not take off. Yes, you're right. Interest rate, as we said, are a necessary condition for investment to take off, but not sufficient. Sometimes we think economics is quite difficult. But check how obvious it is, if you are a CEO of a large company, in a country which is suffering a coup d'etat, or a pandemic. Weak intellectual property rights, poor business environment, corruption, weak legal framework, would you be willing to invest in gross capital formation in that country, just because interest rate were low? No, so again, remember consumption, now investment, I know that investment is negative related to interest rates. But depends on some scenario that's what we say, hence, if you want to express what we have just said, in an equation, we would have the following investment or gross capital formation, or as we say, i depends negatively related to my interests rates, which is i, and also something else on autonomous variables; eo, remember that we are discuss about autonomous variables, coup d'etat, pandemics, risk, and all of this stuff. That's the equation that express my gross capital formation.
