1. Investment

2. • Investment refers to that part of the aggregate output
which takes the form of construction of new structure. It
should be noted, that if a person purchases bonds,
shares or debentures, generally people said that he has
made an investment, but it should not be considered as
an investment. In true sense it is not real investment;
real investment is the investment which determines the
national income and the employment level of the
country. Buying of shares or bonds, or debentures is
only a financial investment; it cannot increase the
employment or the national income of the country. So we
can say that, real investment is the addition of the stock
of physical capital, like machines, tools, equipment and
the buildings.

3. • Investment can be either gross or net, from the gross
investment; the replacement investment must be
deducted in order to obtain the net investment in the
economy. Investment also has a positive relationship
with the level of employment, in other words if there is an
increase in the investment level the employment level
will also increases. According to Prof. Dudley,” A
fundamental principle is that as the income of a
community increases, consumption is also increases but
less than the increase in income. Hence, in order to have
sufficient demand to sustain an increase in employment,
there must be increase in real investment equal to the
gap between income and consumption out of income. In
other words, employment cannot increase, unless
investment increases1.” It is clear from the above
discussion that the investment has a positive impact on
the level of employment

4. Autonomous Investment and
Induced Investment
• Investment can be further divided into two parts, the first
one is autonomous investment and the second one is
induced investment. Autonomous investment is that
investment which does not vary with the change in
income, or there is no relationship between investment
level and income level. According to Prof. Keynes, the
amount of investment depends on the marginal
efficiency of capital (MEC), and rate of interest.
According to him, income level will not affect the level of
investment. He has further suggested that the level of
income can affect the amount of investment only in the
long-run, but in short-run, level of income can not affect
the level of investment. Only the marginal efficiency of
capital (MEC) and the rate of interest can affect the level
of investment in the short-run. In fact the distinction
between autonomous and induced investment has been
made by the post-Keynesian economists.

5. Autonomous Investment
• In general sense, only the government does the
autonomous investment for the purpose of economic
growth and development. It should be noted that the
investment done by the government is not for making the
profit or income, like the investment in the roads,
bridges, hospitals and other infrastructure developmental
projects.
• According to Prof. Hicks,” Public investment means
investment which occurs in direct response to invention
and much of the long – run investment which is only
expected to pay for itself over a long period, all of these
can be regarded as autonomous investments.”

6. • This type of investment largely depends on the growth of
population, technological progress, and developmental
activities of the government, rather than the level of
income. The motive behind the autonomous investment
is not to earn profit but for the development of the
economy. Like, in public sector units, the aim of
government is not to earn profit but to fulfill the needs of
the people. As we have discussed it earlier these
investment are independent of change in income and are
not governed by profit motive. These types of
investments are generally made by the government and
the local authorities for social welfare rather than to
make profit.

7. • In the same fashion government does a huge investment
in the railway and on road transportation. You can
imagine that for 35 Kilometer’s government is taking only
Rs. 5, but in case of private transport you have to pay
many times of it. In a nutshell we can say that,
autonomous investment refers to the investment which
does not depend upon changes in the income level.
These are investment expenditures that would occur
even if national income was zero.We can understand the
concept of autonomous investment with the help of a
figure that is given below,

9. • In the above figure, we have assumed the national
income on X axis, and level of investment on the Y axis.
The level of autonomous investment has been shown by
the line Ia, Ia, which is parallel to X axis, it shows that it
does not vary with the change in income, or there is no
relationship between investment level and income level.
As we can see in the above figure, whatever be the level
of national income, the level of autonomous investment
is same, as we have discussed it earlier that the level of
autonomous investment depends on the technological
advancement and also on the growth of population,
instead of growth in national income.

10. Induced Investment
• On the other hand, induced investment changes with the
changes in the level of income, or in other words we can
say that, induced investment is that investment which is
affected by the changes in the income. As we know that
if the level of income is high, people will consume more
or the level of consumption increases, and to produce
more consumer goods, larger investment is needed in
capital goods. According to Prof. Keynes, it is the rate of
interest which can affect the level of induced investment.
In other words we can say, if the level of income
increases, people will start to consume more, to meet
the additional consumption, the level of production of
consumer goods has to be increase that is only possible
after the investment in capital goods.

11. • The induced investment is undertaken both in
fixed capital assets and in inventories. ”The
essence of induced investment is that greater
income and therefore greater aggregate demand
affects the level of investment in the economy.
The induced investment underlines the concept
of the principle of accelerator, which is highly
useful in explaining the occurrence of trade
cycles.1” The concept of induced investment can
also be understand with the help of a figure, that
is given below,

13. • In the above figure (2), we have assumed the national
income on X axis and the level of investment on Y axis,
the level of induced investment has been shown by the
line, Ii Ii, it is clear from the figure that the level of
induced investment is increasing with the increment in
the level of national income, or in other words we can
say that there is a direct relationship between level of
national income and the level of induced investment. As
we have discussed it earlier that if the level of income
increases, people will start to consume more, to meet
the additional consumption, and the level of production
of consumer goods has to be increase that is only
possible after the investment in capital goods. According
to Prof. Keynes, the rate of interest can also be affects
the level of induced investment.

14. Investment multiplier
• The number of times total income
increases, corresponding to an increase in
the investment is known as investment
multiplier
Or it can be rewritten as
For example if Y (national Y) rises by ` 2000
as a result of an increase in investment of `1000
then the k coefficient is 2 (2000/1000).

15. • The concept of multiplier was first developed by
Prof. F. A. Kahn in the early 1930s. The concept
of multiplier has a vital role to play in the theory
of employment and income. After some time
Prof. Keynes has refined the concept of
multiplier. It should be noted that there is a
difference between the multiplier developed by
Prof. Kahn and the multiplier developed by Prof.
J. M. Keynes, Prof. Kahn has developed the
employment multiplier and further Prof. Keynes
has refined it and developed the investment
multiplier.

16. • ΔC = c(ΔY) ……….1
• (The above equation (1) shows, the change in consumption equals
to the marginal propensity to consume multiplied by the change in
income.)
• ΔY = kΔI…………….2
• (The above equaltion (2) shows the change in income equals the
investment multiplier multiplied the change in investment)
• ΔY = ΔC + ΔI………..3
• (Equation (3) shows the change in income also equals to the
change in consumption plus the change in investment)
• Now we can say that,
• → kΔI = c(kΔI) + ΔI………4

17. • (Therefore arrording to the equation (4), the investment
multiplier multiplied by the change in investment equals
the marginal propensity to consume multiplied by the
investment multiplier multiplied by the change in
investment)
• → kΔI – c(kΔI) = ΔI
• or
• → kΔI(1-c) = ΔI
• after the cancilation of ΔI from, ΔI, we get,
• → 1-c = 1/k
• or, we can rewrite it as,
• → c = 1-1/k

18. • The working of multiplier can be understand with
the help of an example which is given below, as
we have already discussed that the number of
times total income increases, corresponding to
an increase in the investment is known as
investment multiplier. Suppose the government
undertakes the investment expenditure of ` 500
crores, than the income will not rise by ` 500
crores only, but it can increase many times
more. It depends on the marginal propensity to
consume (MPC) of the people.

19. • Suppose in first step the income of the people will increase by only `
500 crores. Let’s assume that the MPC of the people is 80 percent,
as we know that the Marginal Propensity to Consume has to play a
crucial role in the determination of multiplier and it is also a very
important concept because it tells us how much part of the
increased income is consumed and how much saved. Marginal
propensity to consume is the ratio of change in consumption to the
change in income.
• In the above case people will spent `400 crores out of `500 crores,
or in other words 80 percent of the `500 crores. This `, further
increases the income of the people by `, 400, because the people
will spent their income on the consumer goods, and further this
increment of income ` 400 will increase the consumption by 80
percent of ` 400 crores. And the process will continues, the result
was many times increment in the income than the investment done
initially.
•

20. Thanks