Instead of investments in buildings, public investments in machinery can be increased to boost economic activity. The short-term expansionary effect is relatively smaller due to the higher import content of machinery.
Government investment in machinery is increased permanently by 0.1 percent of GDP in 2010 prices.(See experiment)
Table 4. The effect of a permanent increase in public investment in machinery
| 1. yr | 2. yr | 3. yr | 4. yr | 5. yr | 10. yr | 15. yr | 20. yr | 25. yr | 30. yr | ||
| Million 2010-Dkr. | |||||||||||
| Priv. consumption | fCp | 64 | 400 | 543 | 621 | 668 | 804 | 1008 | 1211 | 1324 | 1339 |
| Pub. consumption | fCo | -9 | 276 | 533 | 769 | 984 | 1797 | 2289 | 2584 | 2763 | 2874 |
| Investment | fI | 2537 | 2670 | 2583 | 2564 | 2560 | 2394 | 2254 | 2216 | 2199 | 2172 |
| Export | fE | -32 | -80 | -152 | -243 | -353 | -1098 | -1909 | -2524 | -2857 | -2935 |
| Import | fM | 1315 | 1549 | 1576 | 1613 | 1644 | 1615 | 1521 | 1446 | 1386 | 1345 |
| GDP | fY | 1288 | 1774 | 1995 | 2171 | 2297 | 2411 | 2294 | 2241 | 2261 | 2329 |
| 1000 Persons | |||||||||||
| Employment | Q | 0.88 | 1.30 | 1.49 | 1.59 | 1.62 | 1.07 | 0.30 | -0.20 | -0.42 | -0.46 |
| Unemployment | Ul | -0.48 | -0.68 | -0.77 | -0.82 | -0.83 | -0.54 | -0.15 | 0.10 | 0.22 | 0.24 |
| Percent of GDP | |||||||||||
| Pub. budget balance | Tfn_o/Y | -0.08 | -0.07 | -0.07 | -0.08 | -0.08 | -0.12 | -0.16 | -0.18 | -0.20 | -0.21 |
| Priv. saving surplus | Tfn_hc/Y | 0.01 | -0.01 | -0.02 | -0.02 | -0.02 | -0.01 | 0.00 | 0.00 | 0.00 | 0.00 |
| Balance of payments | Enl/Y | -0.07 | -0.09 | -0.09 | -0.10 | -0.10 | -0.13 | -0.15 | -0.18 | -0.20 | -0.21 |
| Foreign receivables | Wnnb_e/Y | -0.12 | -0.24 | -0.36 | -0.48 | -0.59 | -1.16 | -1.69 | -2.23 | -2.77 | -3.29 |
| Bond debt | Wbd_os_z/Y | 0.05 | 0.11 | 0.17 | 0.24 | 0.30 | 0.71 | 1.21 | 1.74 | 2.27 | 2.77 |
| Percent | |||||||||||
| Capital intensity | fKn/fX | -0.02 | -0.01 | 0.02 | 0.04 | 0.06 | 0.15 | 0.19 | 0.21 | 0.21 | 0.20 |
| Labour intensity | hq/fX | -0.03 | -0.03 | -0.03 | -0.03 | -0.04 | -0.04 | -0.05 | -0.06 | -0.06 | -0.06 |
| User cost | uim | 0.10 | 0.19 | 0.27 | 0.34 | 0.40 | 0.63 | 0.73 | 0.76 | 0.75 | 0.71 |
| Wage | lna | 0.01 | 0.03 | 0.05 | 0.07 | 0.10 | 0.21 | 0.27 | 0.27 | 0.25 | 0.21 |
| Consumption price | pcp | 0.00 | 0.01 | 0.02 | 0.02 | 0.03 | 0.08 | 0.11 | 0.13 | 0.13 | 0.12 |
| Terms of trade | bpe | 0.00 | 0.01 | 0.01 | 0.02 | 0.02 | 0.05 | 0.07 | 0.08 | 0.08 | 0.07 |
| Percentage-point | |||||||||||
| Consumption ratio | bcp | -0.04 | -0.01 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.01 | 0.02 | 0.02 |
| Wage share | byw | -0.01 | -0.02 | -0.01 | -0.01 | -0.01 | 0.00 | -0.01 | -0.02 | -0.03 | -0.04 |
Like building investments, machinery investments have expansionary effects on the economy in the short run. In the long run, the effect on unemployment is zero due to the wage-driven crowding out.▼ The short-term employment effect of machinery investments is smaller because the import content of machinery investments is higher than that of building investments. The smaller domestic activity effect implies that the pressure on wages and prices is also smaller. The resulting real wage effect on consumption is also smaller.▼
It is also worth noting that the accelerator effect on total investment is smaller when investing in machines than when investing in buildings. This is because machines are used for a shorter time periods and the ratio between the stock of machinery and investment is smaller.▼
Note that the smaller impact on domestic production and income implies a stronger deterioration of public budget in the short run than when public building investments or the public purchase of goods and services increase. This is, however, not evident from the tables above because the public demand shocks are made comparable in fixed prices, i.e. all shocks are calibrated to have an impact of 0.1 percent of GDP in 2010 prices on the public budget in the first year.▼ It should also be noted that the modest accompanying increase in government consumption reflects that the higher government stock of capital triggers an increase in depreciation, which is part of government consumption.
The four demand experiments discussed so far have similar effects on the domestic economy but differ in terms of the magnitude of the impact. An increase in government employment has the largest immediate impact on the domestic economy as it has no direct link to imports. An increase in government investment in machinery has the smallest impact on the domestic economy as the import content is high. Similarly, the long-term impact on government budget is the highest in the former and the smallest in the latter.
All the experiments are considered without funding and the public budget balance deteriorates permanently. The public expenditure can be financed by reducing other public expenditures or by increasing revenues. Section 1 below demonstrates financing the public purchase of goods and services by raising income taxes. If income taxes are raised to finance public expenditures the positive effect on private consumption will turn negative as real disposable income permanently falls, consequently competitiveness will not necessarily deteriorate.
Figure 4. The effect of a permanent increase in public investment in machinery
