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Meaning and 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 goods 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.

(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 II/ 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.