The Concept Of Investment

Investment Is The Second Component Of Aggregate Expenditure It Plays An Important Role In The Determination Of Equilibrium Level Of National Income And Corresponding Level Of Employment When The Term Investment Is Used In Economics It Refers To The Expenditure Incurred By Individuals And Businesses On The Purchase Of New Plant And Machinery The Building Of New Houses Factories Schools Construction Of Roads Etc It Is In Other Words In The Acquisition Of New Physical Capital Investment We Can Call It As The Addition To The Capital Stock Of The Economy In Brief It Includes The Following Kinds Of Expenditures
(a)       Stocks or inventories. The Inventories Expenditures Incurred By Businesses On The Purchase Of New Raw Material Semi Finished Goods And On Stock Of Unsold Goods (Inventories) Are Counted As Investment
(b)    Fixed capital. The Expenditure Made On New Plants And Machinery Vehicles Houses Facilities Etc Are Also Included In Investment In The Words Of J M Keynes Investment Means Real Investment Which Refers To Increase In The Real
Capital Stock Of The Economy
Types of Investment
There Are Two Types Of Investment (A) Induced Investment And (B) Autonomous Investment These Two Are Now Explained In Brief
(1) Induced investment. Investment In The Economy Is Influenced By The Income Or Output Of The Economy The Larger The National Income The Higher Is The Investment Induced Investment Is The Change In Investment Which Is Induced By The Change In The National Income The Investment Furrctions Signifies That As The Real National Income Rises The Level Of Inducement Investment Also Rises And As The Real National Income Falls The Level Of Investment Also Goes Down.

 

In Figure (30.5) It Is Shown That The Investment Curve    Is Positively Sloped It Indicates That As The Level Of National Income Rises From 0y¹ To 0y² The Level Of Induced Investment Also Rises From 01¹ To 01²

Shifts in the investment curve. The Induced Investment Is The Increasing Function Of Profit If Firms Expect Profit They Are Induced To Invest The Profit Expectation Of Firms Depend Upon Aggregate Demand For Goods And Services In The Economy The Level Of Aggregate Demand Itself Depends Upon The Level Of National Income The Higher The Level Of National Income The Higher Thus Is The Level Of Induced Investment

(ii) Autonomous investment: The Investment Which Is Not Influenced By Changes In National Income Is Called Autonomous Investment In Other Words An Autonomous Frivestment Is Independent Of The Level Of National Income As Regards The Size Of Autonomous Investment It Is Influenced By Many Basic Factors Such As Increase In Population Manpower Level Of Technology The Role Of Interest The Expectations Of Future Economic Growth And The Role Of Capacity Utilization Etc.

 

 

In Figure (30 6) It Is Shown That Autonomous Investment Curve L_a Is A Horizontal Straight Line For Example When National Income Is 0y₁, The Autonomous Investment Is Rs 10 Billion If National Income Increases To 0y₂, The Autonomous Investment Remains Rs 10 Billion And So On
In Case There Is An Introduction Of New Technologies Or The Rate Of Interest Falls Or If The Businessmen Expect The Sales To Grow More The Producers Choose To Operate To Full Capacity The Autonomous Investment Is Influenced The Autonomous Investment Curve Shifts Upward From Rs 10 Billion To Rs 15 Billion