Investment can be defined and categorized in several ways. It includes the expenditure on real capital formation like new machines, buildings, and inventory. Investment can be autonomous or induced by income, private or public based on ownership, gross or net based on changes in capital stock, ex-ante or ex-post based on objectives, and categorized by propensity to invest. The marginal efficiency of capital and interest rate are key determinants of investment. Government policies aim to promote investment through measures like lowering interest rates, taxes, and increasing spending.

1. Dr. Sukhvir Kaur
Assistant Professor in Economics

2.  The term investment means purchasing of
different kinds of shares and stocks and investing
capital in such activities as are likely to yield.
 Investment is the expenditure incurred for real
capital formation. It includes 3 kinds of items: 1.
new machines and new capital equipments, 2.
construction of new buildings and 3. increase in
stocks.
 According to Keynes, “investment includes the
increment of capital equipment”.

3. Investment
Income
Y
I
O
I
X
Investment
Income X
Y
O
I I
Autonomous investment: It is
that investment which is
independent of the level of
income or output. It is not
induced by income. It is not
made on the basis of changes in
income.
 Induced investment: It is that
investment which is governed by
income and amount of profit. It
increases with the possibility of
income and profit and vice
versa.

4.  On the basis of ownership of investment, it is
divided into two parts, i.e., private investment
and public investment.
 Private investment: it refers to that investment
which is made by private individuals with the
sole objective of earning profit. According to
Keynes, it depends upon two factors: i) MEC and
ii) Rate of interest. If MEC is greater than rate of
interest, more private investment will be made.
 Public investment: It is that investment which is
made by the govt. of a country. Main objective is
welfare of the people, defence of the country and
eco. Dev. It is not induced by profit motive.

5.  On the basis of changes in the existing stock of capital
goods as a result of change in investment, it can be
divided into two parts, i.e., gross investment and net
investment.
 Gross investment: The total expenditure incurred on
capital goods at any given time in an economy is called
gross investment. It includes two kinds of investment: i)
Net Investment and Replacement Investment.
 Gross Investment = Net Investment + Replacement Investment.
 Net investment: Net investment is that investment that
enlarges economy’s stock of real capital assets thereby
adding to productive capacity.
 Net Investment = Gross Investment - Replacement Investment.

6.  From the point of view of objective of
investment, it is divided into two parts, i.e., Ex-
ante investment and Ex-post investment.
 Ex-ante or Planned investment: When the
entrepreneurs make investment according to a
definite plan in order to achieve a given
objective, it is called ex-ante investment.
 Ex-post investment: It is that investment which
is involuntarily incurred by an investor.

7.  Propensity to invest is the ratio between
aggregate investment and aggregate income.
 PI = I / Y
 Average Propensity to Invest: It is the ratio total
income and total investment.
 API = I /Y
 Marginal Propensity to Invest: It is the ratio of
change in investment and change in income.
 MPI = Change in Investment / Change in Income

8. Marginal Efficiency of Capital
Rate of Interest

9. Marginal efficiency of capital refers to the expected
profitability by the use of one more unit of capital.
It depends upon two factors:
1. Prospective Yield: Prospective Yield of a capital
good like, machine, means that net income
which is available during the full life-time of
that machine.
2. Supply Price: Supply refers to the cost of a
machine, but it is not the cost of existing
machine but that of a brand new machine.

12.  Technological advance and innovation
 Discovery of natural resources
 Govt. policy
 Foreign trade
 Political environment
 Expectations
 Rate of population growth
 Territorial expansion
 Price level
 Market structure
 Availability of finance
 Conditions in the labour market
 Present stock of capital goods
 Aggregate demand

13.  Reduction in the rate of Interest
 Reduction in Taxes
 Increase in Government Expenditure
 Price support Policy
 Pump Priming
 Policy of Wage Cut
 Promotion of research

14. Taxation
Loans
Deficit financing

15. Determination of income
and employment
Volatile factors
Economic dev.