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Investment Function Types Determinants

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21 views

Investment Function Types Determinants

Uploaded by

nayanatess
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INVESTMENT

FUNCTION

ATHUL P B – 22UECO6535
ABHINAV N – 22UECO6536
A SURYA NARAYANAN – 22UECO6538
INVESTMENT FUNCTION

Investment in Keynesian economies involves creating new infrastructure and productive


assets, leading to job creation and increased production.

Investment and Capital is interrelated.


In other terms, net investment refers to the investment that leads to a growth in capital. It
is calculated by subtracting depreciation from gross investment.

In simpler terms, the Investment Function in economics refers to a strategy or concept


that shows how people's investment choices are impacted by different factors in an
economy.
TYPES OF INVESTMENT
Generally, investment can be classified into two types. They are :

Induced Investment
An investment influenced by expected profit or rising levels of
income in the economy is termed as induced investment. The
factors that affect profits such as prices, wages, and interest
influence induced investment. Likewise, it is also affected by
demand. At higher levels of income, consumption expenditure
(.i.e. Demand) also tends to increase. Increased demand raises the
expected profitability of the producers who are consequently
induced to make more investment. Thus, induced investment is
positively related to the levels of income in an economy. It
increases with the rise in income and falls as income declines.
Induced Investment is income elastic.

Induced investment is a function of income.


I = f(Y).
TYPES OF INVESTMENT
Autonomous Investment

An investment not influenced by expected profitability of level of


income, the investment on which the change in income level does not
have any effect is known as Autonomous Investment. Autonomous
Investment is income inelastic. It means that if there is a change in
income (increase/decrease), the autonomous investment will remain
the same. In general, autonomous investments are made by the
Government in infrastructural activities. However, a country’s level of
autonomous investment depends upon its social, economic, and
political conditions. Therefore, the investment can change when there
is a change in technology, or there is a discovery of new resources, etc.
DETERMINANTS OF INVESTMENT
According to Keynes, investment rate in the economy is mainly influenced by two factors, Marginal Efficiency
Of Capital and Rate Of Interest.

 MARGINAL EFFICIENCY OF
CAPITAL
● Marginal efficiency of capital is defined as the productivity of capital. Generally, marginal efficiency of capital
shows the cost of capital asset and the expected rate of return from additional investment made. If the rate of
return on any prospective investment is greater than the cost of investment, the entrepreneur is bound to make
the investment and vice versa.
● In simple words, it refers to the expected rate of return from the purchase of additional capital. Return yield
form the additional unit of capital asset.

 RATE OF INTEREST

● Rate of interest refers to the cost of investment. If the rate of interest is high, investment of the capital is
expensive. On the contrary, if the rate of interest is low, investment of the capital is considered to be cheaper.
This shows that an inverse relationship that exists between rate of interest and investment.
 MARGINAL EFFICIENCY OF
INVESTMENT
Expected rates of return on investment as additional units of investment are made
under specified conditions and over a period of time.

 OTHER DETERMINANTS

• COST OF CAPITAL
• TECHNOLOGICAL CHANGE
• EXPECTATIONS AND BUSINESS
CONFIDENCE
• SUPPLY OF FINANCE
• DEMAND FOR GOODS
• THE RATE OF TAXES
REFERENCE

 https://www.geeksforgeeks.org/investment-function-induced-investment-autonomous-
investment-and-determinants-of-investment/

 Https://www.brainkart.com/article/Investment-Function_37073/

 https://youtu.be/0vtznVVRt6Y?si=-KnRO87Q2nrnacq7
Thanks!
CREDITS: This presentation template was created by Slidesgo, and includes icons
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CREDITS: This presentation template was created by Slidesgo, and includes icons
by Flaticon, and infographics & images by Freepik

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