The ultimate aim of every investor is to get huge returns for their investment. However, investors are usually not willing to take too many risks as this may jeopardise their financial situation. Generally, favourable economic conditions make investments less risky. This makes investors seek more risky investments and borrow vast sums of money to reap huge financial rewards from the investments. Increased borrowing drives up the interest rates. Higher interest rates lead to a reduction in investment spending. Occurrences of events that reduce the profits even a little lead to a substantial reduction in investment expenditure (Tucker, 2010, p. 495). This is because investors perceive the market as being more risky. This is the main reason that makes investment expenditure very volatile.
There is a direct relationship between investment expenditure and GDP. A rise in the output of the economy leads to an increase in investment expenditure. On the other hand, fall in output growth makes investment expenditure fall markedly. However, the degree of volatility of investment expenditure is not equal to that of GDP. Investment expenditure tends to have a higher degree of volatility than GDP. The direct relation between GDP and investment expenditure is attributed to the fact that investment expenditure forms a sizeable percentage of GDP. The proportion of investment spending on GDP is dependent on the level of economic development of the country. Generally, investment expenditure accounts for a smaller percentage of GDP in developed countries than in developing countries. In developed nations, investment expenditure accounts for approximately a quarter of GDP whereas in developing nations investment expenditure may account for as much as 40 percent of GDP (Miles & Scott, 2005, p. 322). Investment expenditure account for a higher proportion of GDP in developing countries because developing countries invest more in assets than developed countries.