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Investment
 Generally investment means purchase of shares/
stocks and investing capital in such activities which
yield income.
 But Keynes defines investment differently

Investment
Financial Investment
Real Investment
 Buying stocks and shares of an existing company is
called Financial Investment. But when new machines
are purchased or new factory premises is set up, it is
called real investment. Real investment results in
increase of income and employment.
Definitions of Investment
 According to Stonier and Hague, “ By investment we
do not mean the purchase of existing paper security,
bonds, debentures or equity, but the purchase of new
factories, machines and like.
 Best definition is by Peterson. He says, “ Investment
expenditure includes expenditure for producer’s
durable equipment, new construction and the change
of inventories.”
Classification of Investment

1.
2.
3.
4.
5.
6.
7.
8.
Investment
Induced Investment
Autonomous investment
Private Investment
Public Investment
Gross Investment
Net Investment
Intended/Ex-ante/Planned/voluntary Investment
Unintended/Ex-post/Unplanned/Involuntary
Investment
Induced Investment
 Such investment is
Y
Investment
I
I
Income
X
governed by income and
profit. So it is income or
profit elastic.
 Prof Kieser says, “ When an
increase in investment is
due to increase in current
level of income and
production, it is known as
induced investment.
 Prof Kurihara says that at
very low levels of income
this investment may be
negative.
Autonomous investment
 It is independent of level
Y
Investment
of income or output. It is
made with the aim of
introducing new
techniques, new
inventions etc.
 Such investment is made
for economic
development or defence
sector of the country.
o
I
I
Income
X
Private Investment
Public Investment
 Made by private
 It is made by the
individuals with the aim
of profits.
 Depends on MEC and
rate of interest
 If MEC is greater than R
more investment will be
made. Otherwise no
investment. Also known
as induced investment
government of the
country.
 Objective: Welfare of
people, defence of
country and economic
development.
 Not profit induced
t
Gross Investment
Net Investment
 The total expenditure
 It is that investment as a
incurred on capital goods
at any given time in a
economy
 GI= Net I+ Replacement
I
 Peterson says, “
Replacement investment
is that investment which
maintains intact a given
stock of capital.
result of which there is
increase in capital stock.
 Peterson-net investment
is investment that
enlarges economy’s stock
of real capital assets
thereby adding to
productive capacity.
Ex-ante Investment
Ex-post Investment
 It is made voluntarily,
 It is done involutarily
according to definite
plan, to achieve a given
objective.
 Such investment is
generally done by
government to achieve
the target of employment
generation of economic
growth.
by investors. Many a
times due sudden fall
in demand the stocks
may plummet. So
investment in such
stocks is against will of
investor.
Propensity to Invest ( I/Y)
Average Propensity to
Invest
Marginal Propensity to
Invest
 It is the ratio of total
 It is the ratio of change
investment to total
income.
in investment to
change in income
 If income increases by
rs 10 crore and as a
result investment
increases by 5 crore,
then MPI=5/10=.5
 API=I/Y
Determinants of induced investment
 In private sector, inducement to invest is influenced by
two determinants- MEC and rate of interest
 MEC: It stands for expected rate of profitabilty when one
more unit of capital is employed. MEC depends upon two
factors- Prospective yield and supply price
 Prospective yield: PY is calculated by aggregating net
income of every year of a machine through out its life
time. To estimate net income, cost is deducted from
annual output of machine.
 Supply Price: It is the cost of the machine. But not the
cost of existing machine but that of a brand new
machine.
 MEC can be found by deducting supply price from
PY. As supply remains fixed, so MEC is more
influenced by PY which is uncertain.
 Rate of Interest: “Interest is the reward for parting
with liquidity” Keynes. Higher the rate of interest,
greater will be the keenness on the part of people to
part with liquidity. LP also affects rate of interest.
 Greater the LP, higher will b the rate of interest.
 Every entrepreneur
Y
MEC & rate of interest
compares MEC with rate
of interest while making
investment.
 He will make investment
if MEC is greater than
rate of interest.
 If they are equal, it will
be breakeven point.
O
MEC=R
R
R
E
MEC
Investment
x
Factors affecting investment
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Technological Advancement and innovation
Discovery of natural resources
Government policies
Foreign trade
Political Environment
Expectations
Rate of population growth
Territorial Expansion
The price level
The market structure
Availability of finance
Conditions in the labour market
Aggregate Demand
Measures to stimulate Investment
Private Investment
Public Investment
 Reduction in rate of
 Taxation

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interest
Reduction in taxes
0f wage cut
Increase in govt.
expenditure
Price support policy
Promotion of research
Pump pricing
 Loans
 Deficit financing