National income investment function

Notable economists and thinkers within economics. Part of a series on Macroeconomics Basic concepts. Related fields Econometrics Economic statistics Monetary economics Development economics International economics. Compare Investment Accounts. Try It. Figure 2.

Employment and Output Determination under Classical System

Capital refers to any financial assets or real assets such as plants, equipment, factories, and inventories of semi-finished as well as finished goods that have financial value. In economics, capital is usually referred to as the factors of production used iinvestment the production of goods and services. It can be defined as any produced good that can be stocked and used for further production of goods and services. Investment in Keynesian economics refers to real investment which implies the creation of new factory buildings, roads, bridges and other forms of productive capital which directly generates new jobs national income investment function increases production. The concept of investment is not expressed in terms of financial investment because it usually refers to capital ownership rights that are transferred from one person to. It is undertaken on shares, bonds. Investment and capital are interrelated.

Aggregate Expenditure: Investment, Government Spending, and Net Exports

Read this article to learn about the importance, types and determinants of investment function in an economy. Consumption depends upon the propensity to consume, which, we have learnt, in more or less stable in the short period and is less than unity. Greater reliance, therefore, has to be placed on the other constituent investment of income. Out of the two components consumption and investment of income, consumption being stable, fluctuations in effective demand income are to be traced through fluctuations in investment. Investment, thus, comes to play a strategic role in determining the level of income, output and employment at a time. We can establish the importance of investment in another way also.

Read jnvestment article to learn about the importance, types and determinants of investment function in an economy. Consumption depends upon the propensity to consume, which, we have learnt, in more or less stable in the short period and is less than unity. Greater reliance, therefore, has to be placed on the other constituent investment of income.

Out of the two components consumption and investment of income, consumption being stable, fluctuations in effective demand income are to be traced through fluctuations in investment.

Investment, thus, comes to play a strategic role in determining the level of income, output and employment at a time. We can establish the importance of investment in another way. This means that a part of the increment in income is not spent but saved.

The savings must be invested to bridge the gap between an increase in income and consumption. If this gap is not plugged by an increase in investment expenditures, the result would be an unintended increase in the stocks of goods inventorieswhich in turn, would lead to depression and mass unemployment. Hence, investment rules the roost. In Keynesian economics investment means real investment i. It does not include the purchase of existing funciton, shares and securities, which constitute merely an exchange of money from one person to.

Such an investment is merely financial investment and does not affect the level of employment national income investment function an economy. An investment is termed real investment only when it leads to a increase in the demand for human and physical resources, resulting in an increase in their employment. Investment is a flow variable and its counterpart is stock variable called capital. Funvtion may be private investment or public investment, it may be induced or autonomous.

Induced investment is that investment which changes with a change in income, that is why it is called income, elastic. In a free enterprise capitalist economy, investments are induced by profit motive. Such investment is very responsive to changes in income, i. The shape of the induced investment curve, therefore, is upward sloping, indicating a funcyion in investment as a result of rise in income.

According to Hicks, investment is infestment two types, induced as described above and autonomous— it is independent of variations in output. Harrod calls it which is only expected to pay for itself over a long period, all of these can be regarded as autonomous investments. Autonomous investment is not sensitive to changes in income. In other words, it is independent of income changes and is not guided or induced by profit motive.

Autonomous investments are made primarily by the Government and are not based on considerations of profit. Autonomous investments are a peculiar feature of a war or a planned economy, for example, expenditures on arms and equipment to strengthen the defence of India may be called autonomous investment as it is incurred irrespective of the level of income or profits.

Hansen maintained that autonomous investment is generally associated with such factors as introduction of new production techniques, products, development of new resources or growth of population. Induced investment is undertaken specially to produce large output. The curve of autonomous investment is represented by a straight line running from left to right and parallel to the horizontal income axis. The distinction between induced and autonomous investment is shown in Fig.

Investment, as we have seen which is in the nature of How of expenditures, during a given time period, on view fixed capital goods or is in the nature of invdstment addition to the stock of raw materials and unsold consumer goods is called gross investment.

However, replacement of investment denotes to the expenditures incurred to maintain the stock of capital, in an economy, intact. This type of expenditure is undertaken to offset the depreciation, wear and tear and obsolescence in the existing productive capacity.

Net investment is, thus, the excess of gross investment over the replacement investment. The term net investment is, therefore, sometimes used for capital formation. It is the variations in the I n which causes fluctuations in Y, O and E both in the short-run and in the long-run. It may not be out of place to investmet that net investment may also include expenditures on new durable consumer goods besides the expenditure on new capital goods.

Therefore, in a sense, it would be more appropriate to define net investment as the net addition to the stock of capital including the producer and durable consumer goods.

Capital here means funcfion in the stock of plant and equipment held by business units. It is therefore, clear that for economic growth, that is, if the economy is to grow over time its capital stock must also grow. Private investment induced investment depends upon the marginal efficiency of capital and the rate of.

The marginal efficiency of capital, in turn, depends upon future expectations which fluctuate violently. Hence, private investment becomes highly capricious and is very low, when in fact, it should be very high.

Prospective entrepreneurs keep on comparing the marginal efficiency of capital with the rate of interest and decide to invest only when the former is higher than the later. There will be no investment if the rate of interest is higher than the MEC.

In other words, if profit expectations are not very bright ; that is the reason why investments fall to low levels during depression period, despite the fact that all types of encouragements are given to private investors to invest. Classical economists regarded investment as dependent on the rate of interest; this to them was an important lever by which investment in the system was regulated.

This is why they relied too heavily on the rate of interest to control fluctuations. They always held that by manipulating the rate of interest, stability in the economic system could be restored. Until the Great Depression of the s. Keynes also adhered to this view and believed in the efficacy of the rate of interest in solving the problem of cyclical fluctuations.

But later on, he realized its weaknesses and stopped giving it undue importance as cyclical stabilizer. Keynes realized that investment depended more on the psychological factors like the marginal efficiency of capital and not on the rate of interest; as such, it was relegated to the background. It is, natlonal doubt, true that the marginal efficiency of capital has become the chief determinant of investment yet the influence of interest cannot be ignored as both go to determine it.

The significant role of public investment, also called the autonomous investment, which the Government may incur to incoem the economy from falling further to lower income levels, comes to the forefront. In the nature of the case, public investment is national income investment function of the profit motive. Since a steady investment is essential for the investment multiplier to have positive effect on income, output and employment, during depression, motives other than profit are necessary nattional guide more investment— a function which is fulfilled only by public investment.

Further, the amount of public investment cannot only be controlled but is capable of expansion to such an extent to make the investment multiplier work with greater force finction would otherwise be possible. Moreover, the government can prevent it from leaking out of the spending stream, as well as is capable of timing it, so as to let the multiplier have its full and free play.

There is no reason why public investment should not be wealth- creating as well as employment-generating and why its adverse tertiary effects if any cannot be offset as a result of the beneficial effects of multiplier on private consumption. Hence, the importance of public investment. It, invextment, becomes necessary to analyze the various measures which stimulate investment. Approaches of Saving and Investment Equality.

Top 9 Measures to Stimulate the Investment of Employment.

Macro Unit 2 Summary- Measuring the Economy

Fiscal Monetary Commercial Central bank. For example the functlon column, consumption, comes from Table 2, and the fifth column, net exports, is computed from the numbers in Figure 4. In the Keynesian cross diagram, government spending appears as a horizontal line, as in Figure lncome, where government spending is set at a level of 1, regardless of the level of GDP. Adding I,G and X shifts the function upward. The classic national income investment function function suggests consumer spending is wholly determined by income and the changes in income.