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.
•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.
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.
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.
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.
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.
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.
Cont….. Transport and auxiliary machineries. Office and general endowment for indirect workers and management. Any long- lasting improvement in those items.
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↑
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.
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.
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.
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.