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Home Determinants of the Level of National Income and Employment Concept of Investment

 

Concept of Investment:

 

Definition:

 

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 Expenditures:

 

Investment, in brief, includes the following kinds of expenditures:

 

(i) Stock or Inventories:

 

The 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.

 

(ii) 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 (1) Induced investment and (2) Autonomous investment.

 

There two are now explained brief:

 

(1) Induced Investment:

 

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 also down.

 

Diagram:

 

 

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.

 

(2) Autonomous Investment:

 

The 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.

 

Diagram:

 

 

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.

Relevant Articles:

Psychological Law of Consumption
Propensity to Consume
Determinants of the Consumption Function
Concept of Saving
Concept of Propensity to Save/Saving Function
Concept of Investment
Concept of Marginal Efficiency of Capital (MEC)
Factors on Which Marginal Efficiency of Capital Depends
Concept of Employment and Full Employment
Full Employment
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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