Question

Critical Thinking: Explain the correlation between the stock market and private investment. Remember, private investment, a component of GDP, is not the same as personal investment, which is not a separate part of GDP.

Answer 1

The stock market and private investment in the economy is positively related. As the returns on the stock market increases the level of private investment in the economy also increases. This is because increase in stock market returns increase the returns on stock market investment for the investors in stock market. This earned revenue can be used to invest in other ventures and measures and thus level of private investment in the economy increases.

Thus, there exists positive relationship between the stock market and private investment.