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
capitalgoods.Net investment---It is the additional capital goods
produced inexcess of those that wear out and need to
bereplaced.---Net investment deducts depreciation fromgross
investment.
4. Cont.Investment plays six macroeconomic roles:It contributes
to current demand of capitalgoods, thus it increases domestic
expenditure. It enlarges the production base (installedcapital),
increasing production capacity.It modernizes production processes,
improvingcost effectiveness.
5. Cont. needs per unit of output, thusIt reduces the
laborpotentially producing higher productivity andlower
employment.It allows for the production of new and
improvedproducts, increasing value added in production.It
incorporates international world-class innovations andquality
standards, bridging the gap with more advancedcountries and helping
exports and an active participationto 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 OFINVESTMENT 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
11. Investment curve
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.
