Investment is an important
component of national income. 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 an businesses on the purchase of new plant
and machinery, the building of the houses,
factories, schools, construction of roads etc. It is, in other words the
acquisition of new physical capital".
Investment, in brief, includes
the following kinds of expenditures:
(i) Stock or
inventories expenditures incurred
by businesses on the purchase of new raw material, semi finished gods and on
stock of unsold goods (inventories) are counted as investment.
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 (1) Induced investment
and (2) Autonomous investment.
are now explained brief:
Investment in the economy is influenced
by the income or output of the economy. The large 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 function
signifies that as the real national income rises, the level of inducement
investment also rises and as the real national falls. The level of investment
In figure (30.5), it is shown that investment curve I/ is
positively sloped. It indicates that as the level of national income rises from OY1 to OY2, the level of induced investment also rises from OI1 to OI2.
Shift in the
Investment Curve: The induced investment is
the increasing function of profit. If firm 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.
investment which is not influenced by changes in national income is
autonomous investment. In other words an autonomous investment is
independent of the level 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 Ia is a horizontal straight line. For example, when national income is OY1
the autonomous investment is $10 billion. If national income increases to OY2
the autonomous investment remains $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 producer choose to operate to full capacity, the autonomous investment is
influenced. The autonomous investment curve shifts upward from $10 billion to $15 billion.