2. DEFINITIONS OF INVESTMENT
The part of national income or national
expenditures devoted to the production of capital
goods over a given period of time.
Investment is the value of machinery, plants, and
buildings that are bought by firms for production
purposes.
3. •Gross investment
---It is the total expenditure on new capital
goods.
•Net investment
---It is the additional capital goods produced in
excess of those that wear out and need to be
replaced.
---Net investment deducts depreciation from
gross investment.
4. Cont…….
Investment plays six macroeconomic roles:
•It contributes to current demand of capital
goods, thus it increases domestic expenditure.
• It enlarges the production base (installed
capital), increasing production capacity.
•It modernizes production processes, improving
cost effectiveness.
5. Cont……. needs per unit of output, thus
•It reduces the labor
potentially producing higher productivity and
lower employment.
•It allows for the production of new and improved
products, increasing value added in production.
•It incorporates international world-class innovations and
quality standards, bridging the gap with more advanced
countries and helping exports and an active participation
to international trade.
6. COMPOSITION
Capital accumulation takes place
in many institutional sectors of the
economy
(firms, households, public sector).
Investment is just new capital
accumulation in business (both
private and state-owned).
Household by convention do not
invest, even if it does exist a
capital accumulation in
cars, computers, electric
appliances, etc.
7. Cont……
Public expenditure is partly devoted to
roads, railways, infrastructure, buildings (as for
schools, hospitals).
All this is clearly capital accumulation whose
utility will last over time.
Still, it is quite a common practice for investment
in public sector being considered zero by
convention.
8. CLASSIFICATION OF
INVESTMENT
Investment is classified according to the degree
of directness with which it is linked to current and
future sales:
Inventories stock of finished goods, semi-
manufactured goods, and raw materials in
commercial premises, storehouses and producers'
plants.
Equipment for direct production of services and
goods.
9. Cont…..
Transport and
auxiliary machineries.
Office and
general endowment for
indirect workers and
management.
Any long-
lasting improvement in those
items.
10. Investment Function
There exists an indirect relationship between the
rate of interest and level of investment.
Investment is a decreasing function of rate of
interest.
There exists a negative relationship between rate
of interest and level of investment.
I = f (r) or I = f (i)
i↑ I↓ and i↓ I↑
12. AUTONOMOUS INVESTMENT
It is motivated by service
motive and is independent
of margin of profit.
It is income inelastic and as
such, it is not influenced by
variation in income.
It is not profit oriented and
accordingly, it remains
unaffected by the variation
in income, price,
wage, rent, etc.
13. Cont….
Autonomous investment is made by the public
bodies or by the private bodies (organization or
individuals).
Erection of street light poles, by the municipal
bodies, construction of high ways and public
buildings by the government and construction
of private schools, buildings, charitable houses
etc.
14. INDUCED INVESTMENT
Induced investment refers to
the investment which is motivated by the margin
of profit.
The higher the margin of profit is, the larger the
volume of investment.
In other words, it is profit
originated investment and varies with the margin
of profit in the like direction.
15. Cont……
Margin of profit depends upon other things
remaining the same, on the size of income and as
such, induced investment is income elastic.
It means that it varies with the increase in the
same direction. As the income rises
the investment also rises and vice versa.
