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Investment and money

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  • 1. InvestmentMaaida Hussain Hashmi
  • 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, thus•It 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.