Scribd Logo
Upload

Welcome to Scribd!

  • MEC, MEI, Accelator Investment Behaviour, Tobins Q

    Uploaded by

    simran simie
    41 views21 pages

    Original Title

    MEC,MEI, accelator investment behaviour,tobins Q

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    41 views21 pages

    MEC, MEI, Accelator Investment Behaviour, Tobins Q

    Uploaded by

    simran simie

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 21
    rHecanes © new durable the comm wd cneke Hence net wet a the prod as investment fro, ‘lth arded as me asuheye may pon of ew us tes don velar ind ee etna eet cxnain 3 Invest nese eC any A0UNO NS econ used interchan, fit 21, Meaning otlmnest business Lay, MOY ent can thus be used interchang, comput Fh tn om a fA ca he He ormation pale eto the moder RENE en eae ith toe iethe purchase of old asser, ae Kesnesren theoris,invest™ i variable in diture o7 Oy as the financial inves might AGheimow volante and aE ogee expended simpy 36 the anything west might er ete orth ate of BY pecan it does not invarve a3 ownership frat posit pncined to the behaviour of iavtiects in 8 mere transfer the other and the stock. fants icsnet sober the magniade of t 1 oye indi idvital is left unchanged, with npnifican manner he magia Of HE one ind during 2 Give wih sich rotcuvcapnlyoftczoremy. “"C invetment during 8 Sven period os Fa eee cll role in ie the sum of net i inst 9s investnea ucil roe 7 ic gelemtntgn of herr en Lens im Auctuations in income or 04 1 seinen of longing pub ofthe investment and fy and economy. are respectively the net investment and the } Fw ef een etinveriment; Invesment To cment investment. The fluctuations in : is a flow of expenditure over a given period o hold key to all types of short term P ume on new fixed capital goods (e.g., factories, ‘i a addtion to te #7 changes in income, ou ck of gent hoses) Se raerion tte employment. Ifin a given time period 1, >I £oods ete, But such a conception of investment implies that I, is posi ve and that the stock of felers to thr gross investment. A part of the capital will increase equivalent to I, sPhaiditure may be incurred for the purchase situation there would be an exp; of such machinery, Gd ii V Gii) iff = rethen Cye Vv In the first ease, since i > r, Price of an asset (Cy) is less than the Tonh orthat acct Once hese che eee there would be a strong preference on the pari of the entrepreneurs, to undertake new investment in fixed capital, provided other endogenous of exogenous factors. remain unchanged. In the second case, since i< r the supply price exceeds the value of the capital assets and there will be a pessimistic situation in respect of new investment in the fixed capital assets. In this situation, the investors may like to make use of their funds in financial transactions like the purchase of old issues of bonds and securities. In the third case, wher i= r, the supply price of the capital assets (Cg) is just equal to the present value of the assets (V) and there will not be any net addition or decline in the amount of real investment. This may be shown through the hypothetical table 15.1. TABLE 15.1 Direction of Change in Real Induced Investment the supply v 25000] !25000) !25000) Neutral Table 15.1 shows that Cp is Rs. 20000, and given the constant annual yield of Rs. 5000, i is 25%. The corres-ponding V, given the marke rate of interest 20%, is Rs, 25000. Thus V > Cp and there would be a favourable or a positive change in the volume of real investment. When i is 16.67% and r is 20% andorresponding Cp and V are respectively Rs. 30000 and Rs. 25000, the investment would be negatively afected. When both V and Cpr are equal at Rs. 25000 and i andr are at 20%, the effect on investment is neutral. 190 Given the tate of interes and peices of asst he nctional elation teen ta the staf capital Wee he SC Ace nthe ong rans wih a inten An the tak Cail, MIC ee ete hecaueo ot to eatne ~ { fall i pape Yiekis or expected returns due to competion Been old and nes eaptal assets an te in supply price of enpitalasete de to nse In Non term input price. ‘Thus there am inverse relation between MC and stock ef eapital a0 that MIEC schedule slopes negatively the MEI schedule, on the other hand, expresses 1 functional relationship between different rates of interest and the corresponding amounts of investment, when the MEC is given. Ifthe price of capital asset increases with an increased demand for capital assets, the MEI schedule depicts an inverse relation between rate of interest and the amount of investment (increase in capital stock). Consequently MEI schedule slopes downwards from left to right. In Fig. 15.2 (@), capital stock (K) and MEC (@ are measured ‘along the horizontal and vertical scales respectively. MEC curve slopes downwards from left to right. Tt shows that the increase in the stock of capital from Ko to Ky and K> leads to a fall in the MEC from ig to iy and i; respectively, when the rate of interest and prices of capital assets remain the saine. In Fig. 15.2 (ii), investment (1) or change in capital stock is measured along the horizontal scale and rate of interest (r) is measured along the vertical scale. The MEI function slopes negatively. It shows that the fall in rate of interest from ro to ry and rz leads to a rise in investment from Ig to ly and Jp respectively, {MACRO-ECONOMIC Anny, co og doen onthe jons inci reaction aiees CaP, Oe and exogenous fa weather. But the s Weed Into two ores © These fac ctors = s ome system aw Seausing shifts i ie veg eater ashon pee | inves see realised cu, . re oa ‘ome : The curren The seman ere HN oy eve of weome Ths elite cine fo rn cil er pens are OU 8 9 hy naa & SF Iieetas 10 the inne investment schedule. Bees imulu ol sched Be 5S Ser erest an upward shin eT om the omer nae 1a inthe ete of interes, iawer level of returns fonction. The 141 per cent aint ase tN jower evel investment fnetion Be intrest casino investment CE) 1, O45 amie cen time pr Keynes believed: the investment hi Keynes lieved that in the ferest-clastic nction is relatively fess interest-clasi 1° chor ron even though tay Be einer case inthe Tong ram, Tis Beer ath the gtadies subsoquently undertaken in both the USA, and Brisin, The shorvrun interes! incastciyof invesment function or the MEI function is attributed to shorter planin " horigon of vesment uncer, depres of contol ove ‘markets, internal financing and the size of firm. 153. Shifts in the Investment Function Shifts ‘The MEC or MEI curve can undergo s in the upward and downward directions. These shifts are caused by such changes as are of a than the changes tron conus pede he pose ee spend indamental nature than : at Boop about raccfintea The to conurerB ‘me the preceding. $0 -xpectation: in fature det (ii) Level and trend of consumer de; f the existing level and 1 factors can be put into two categories will get brightened = end this type of distinction b ~ internal and extern ons : ( I the object is to predict the rate of investment a year fro exogenous factors to can be done by cone effect of en He. degenous factors on the investmens. and inf mM now, assuming the it remain fairly constant, this the demand for cer “ntrating upon the shifting 800ds is expected t ill be undertaken. But in th nOUS at rogeno rihara regards Will be un ype of disieeean seen ‘Forees the slackness. of consu: lal t0 the economic system considerably dampen the as useful for two reas itis also ihe economy, generall i : i ; Y speaking, | ating effect upon the volume of | aust Pt e ent Windfall profits dy lation, © ie of change in incomes ee ie ca ettion will shift inane of he ot vein bom the iavesmien eneurs find that the ray senator an ¢ entrepre Keynes was supported by dition, Ife envepreneurs find that th = of chanetious period has gone down, the investment expenditure is likely to be curtaieg, because the present state of phenomenon wed ice vet lol phtocon al av 1 upon the rate of change of income. 10 incre schedule is ij Conditions ‘ave the th mand of consumer demand ig pects of profit, he additional investment § © Opposite situation, mer demand wil] enthusiasm for new rease at a higher rate _ ‘ast for long in future, iKely to be The inflationary Tepreneurs expect to rng inflationary times, beyond certain ‘amaging effect on HEC inves price marg cond depre (i Price the 1 facte inve worl effe its ¢ com will sag THEORIES OF INVESTMENT margins of the business firms, ‘Tie deflationny depressing effect on the i 5 fements of others factors prices also exert in uence upon the investment function. ‘The classical bine ny workers’ carnings is likely to have a dey effect on the volume of investme its effect upon the aggregate sp va soe ane Met eect on investment nese ig gy inereared demand forthe capital sar cane teres HE the wages are allowed to et ‘The equilibrium gets re-established when sag slowly. Such a state marks the entrepreneurs 10°: | investment, equivalent vo the gap between Postponing their investment plans. If the wages the aewal and’ desired, eapitat stock. ie are allowed to increase, that willbe atthe expense yertaken by the envepreneurs, ‘The question of the entrepreneurial earnings and the incentive Tally arises whether the achievement oft for new investment may be considerably reduced. Couitibeium is possible within the same time Similarly the relative changes in the earnings of Fatiod ‘or after @ longer time. ak ets capitalist, rentier and entrepreneurial classes vis- {oon the productive capacity of the i - a-vis workers will bring about a substitution Yode industry. If the sul et capil the different factors andthe impact upon ‘Goegsinduty is perfety eli, the ne cateieenc oil, n iM equal the gap between act investment wil vary from situation to suation Tyviment wl equa he ga te ‘pitoriom depending upon organisational, marketiMg, yg dese stock of capil and he ae financial and technical factors. ill ie ashived in i tre eas ital : ‘The marginal however, the 8 eee er oO ee . oe niga rena the remains the a eet ase productive efficiency of capital, increases. investment woul Nee k of capital increas i the capital goods industry. same, decreases as the stoc A ety af te : se Ainge ne sok of rac) tenn sy ital assets tends to in rising indicating that t aat capital f capital because of a (i) fall i the law of increasing costs, as oe efficiency of oofds and a (ii) rise in the {terest is pushed up, the supply pre also ses tye Ye i Antes 0sts an * Prese ee f capital assets. ponte rise in costs nd theo, aaa one i this situation, ee es in the MEC in response 10 NE rate of return decline, In Sn jhe chang ital can be show f investment is c nina i kc of capital Tate of invest A eaken in the ac changes in the sec The actual stock of fies and much time yl beaten ‘seapita, through Fig. 159. ee But when the stock of of optimum level o svrve of capital capital at rp MEC is Ko: ON here is a decline Assuming tha the SUPB oe ke capital increases from Ko 0 ry. Every profit rfectly elastic cromngeds the ate of in the MBC from 70 (vill try 10 achieve supply pecs etme wl be deterined amising business WI ‘apital where ent per unit of Wi i) of Fig. 15.4, maximising O'’jjmum stock of capi he investment PE Pm In part (i) ng int of optimum, es equal to the Shown in Fig. 15.8. Tt stocks at vary the point f capital becom i unit asl ‘els of capital that the stock of cap! the business the different lev TE we assume the actual ital so that neither the re shown. ei 7 ck of capital s d there is NEN, verest rates are shown. ly 13, the acl desired sto librium an ital imlerer interest is initially 13, IDE Cree at han e of equil sting stock of capi te of interest sal at this inl a is ina stag! the existing stor ‘han fal x of capital "eof capi y to add to jon in it. Suc! ‘red stocl rum stock of cap tendency any reduction Sieve when strresponds aK. The opi art Gi) of Fie: 1S nor to a ituation is a interest. © interest rate. ilibri situatl of intel ag Ky at ry im en mes equal to the rate is Ks ecOl the MEC bes the rate w the given MEC, he rate of interest falls below the If the Fig. ‘MEL (Margi shows # series oemen s which, given the rate of foes k of ‘capital and the supply price of capital goods, show the rate of investment per uns! of ume. Part (1) of this Fig. shows the supply carve of the capital goods industry which 4s perfectly clastic. § indicates the production capacity of this industry and the gross investment OT is constituted by OR replacement investment which remains fixed and RT is the fet anvestment during the given time period. Jnitilly when the rate of interest is rs, the Aniual stock of capital is XK, and the equilibrium point is A. Given the stock of capital, rate of inetest and the MEC, the relevant MEI curve 2 18 equal to MEC. this case is INF and the net investment 154. ; ital stock, new investment wal inal Efficiency of erate of OF per unit of time, scones the MC coFrespo Mtoe, th Part sloping @ ake pl If the supply curve of the capital ¢ industries is rising, the rate of investmese the increment in the stock of fj gradually decreases as the economy apprg the optimum level of capital stock. ‘Theat supply curve of the capital goods implies tha 7 an increase in the output of Capital g 4 involves a rise in the costs so that the supply LE Price is higher. As the supply price of theewey goods goes up, the MEI curve shifts down and the rate of investment Per unit of time decreases This has been shown in Fig. 15.5. In part (i) this figure, MEC curve indicates the dif at levels of capital stock at different rates of interest. In the initial time period, Ky is actual stock of capital at rs interest rate and the optimum desired Stock of capital is K, at inrrest rate, This Sap between the actual and ie Sptimum Capital stock makes the investr ‘More profitable, Part (ii) of the Fi Curves, Orresponding to Kj stock’ Pe a the MEC and the rate of inte ae Pe ¢ marginal efficiency of investmen” the increased supply price low Fig.15.5. that OR is the replacement investment and RT (= OF) is the net investment. Initially when OF net investment is undertaken, the stock of capital after the first time period increases by K,K2. Given the MEI curves as MEI;, MEI; and MEI, in the subsequent time periods, the rate of investment decreases from OF to OG, OH and OM. It shows that the growth of capital stock continues to proceed at a lesser and lesser rate. So it will take much longer time for the economy to achieve the optimum stock of capital as compared to the time involved when the supply curve is perfectly elastic. (v) Course of stock exchange prices : The investment decisions of the entrepreneurs are influenced also by the stock exchange eee of the speculators. The current moods of optimism or pessimism, prevailing in the stoc! 4. IM, Keynes : The General Theory (1936) Tre TANRE Markets, have wg = Ne investment function seat De2ting upon the speeulyons Wk PES are untaveur ee Conte in tat th end ane OUe 3nd these uificulies im forter Sane, the capital. ‘The opimiue Pessimistic expectations are Contagious and welfentorcing and cause an exaggerated movement of prices. It is on Consideratio, that Keynes remarked ten “the capital development of a ‘country becomes a by-product, Of the activities of a casino.” ien there is an all-round Pessimism in the stock the MEC continues to ak downwards, under the impact ‘of a wave of pessimism. In the opposite situation, the MEC schedule continues to shift in the upward direction. (®) Exogenous Factors ‘The investment function is also greatly influenced by a number of long run dynamic exogenous considerations which are independent of the evel of income. Emphasizing the role of these factors, Keynes states that the economic implications of a shifting schedule of the MEC are “not only that slumps and depressions are exaggerated in degrees, but that economic prosperity is excessively dependent on a poltical and social atmosphere which is congenial to the average business man.” The major exogen- ous shift parameters are mentioned below : (i) Technological inventions and innovations : The technical advance manifests itself in new technological inventions and innovations such as improvements in the old products, machinery and equipments, organisational changes, introduction of new products and opening of new markets. Schumpeter states that innovations bring about the bursts of investments. The extension of rail-road network in U.S.A. was a major r | ot por captt inthe i source of donee ee a ts at scond W wl | justry after the he more Fe industry py ding Ae ally reac mbt an | have boon ot man iio | ci) Narra reson ate a8 we | nwt sous of fa mn changes 1m actually TT cic resourees are a rence the Tong ran investmen! PIT, tana reure, The discovery OFM ection | ne he one prospests for increased prove of the other ray s inst ce among the entrepreneurs and 1h sonftiense amon ty ig” be made. THE Uaysvourable circumstances 4 this F650 unfavourable cite ‘oct the investment decision. adversely | (ii). Growth and composition of population : ‘This dynamic factor is also respon: iis causing shifts in the investment function. | prospect of a future rise in population favourably influen investment decision in two ways. Firstly, the demand for capital is increased by the higher future levels of demand for consumer goods. Secondly, the growth in population makes more labour available to work with given amounts of capital in the future time periods. The changes in the composition of population determine the relative changes in demand for the different categories of consumer products. (ix) Labour movements : The conditions in the labour market affect significantly the investment decisions. The frequency of strikes and lockouts, the strength of trade unions and the attitude of union leadership towards the employers determine the degree and state of indus peace in the economy, Accordingly. there can be shifs in the investment functor in the upward or downward direction (+) Consumers’ psychology + tf the tast and habit patterns of the consumers undergo frequent changes, there will be the niger an introduction of new and bet Products rather more eae regular increase in the growth of cana However, if the demand Patier unchanged for a very Ion tim consumers are not at alj inclined to i modes of consumption, the Tat tah investment would be quite ow: ” (*) Political environmen If the po} Politica iene ad ntry iS Very peacety) ‘THEO! eof the cont free from both the i s armanions ihe fear of Foreign agpregy! preser isorder A yer a long period can Proceed” volati investment rremplated by the entree the d the lines, corily disturbed violent angi’ abser Under PO ces, the investment Function Ta stagn circumstance! tnves (op social and legal institutions. 15.4. (vil) iptability of an economic Fy F economic realities is io the chant al-instiutional. stupa Ol | inthe socioly. If there is a greg M8 ty in the sociological and institutig bite, the initiative for the new inves’ structs severely restricted. Ina fet remain and progressive social order, ther gym prospects of continuous forward eihe investment expenditure. (viii) Development of new territories ; opening up of the new markets through gg development of hitherto backward regions 5 the extension of means of transport a communications, industrial, commercial residential construction along with the assurang of banking and financial facilities, pave the for the expansion of investment activities the entrepreneurs, oe (ix) Foreign trade : The existing level ¢ international trade and the prospect for th expansion of trade with other countries brigh the possibilities of increased investment even the long period and thus the investment funct Continues to shift in the upward direction. (x) Monetary and fiscal policies : Current and the future restraints on the supply of money and credit as well as the rates and) sttucture of taxation which are likely to} imposed by the government are also the tesiderations which weigh very heavily wil investre er MeUrS While they undertake nef fea rent, The investment function is likely ted up, when the economic policies of te are relatively more permissive 8 | * Profit margins to the entrepreneu prevails of rig allow large Offinvestare fre THEORIES OF INVESTHE}y rT So long ay 'S they present, the invesimene, dyn Yolatile, sensiting ment f Sensitive and iy amie forces of the economy win” Ono stagnation and wilt : will investment activity 4, ct induced inve: in the level this principh facts stment is a func iment is.a funet ts Out to explain wo important @ A special tech specia nological relationshi uss between the demand forthe fal eae capital ‘ that level of outpuicdnd| SESSA 0 torn out ion of the change (i) The demand for e: volatile than that for the final products Originally the accelerator or the acceleratio co-efficient was defined as a ratio of net induced investment to a change in the consumption expenditure. In this sense, it can be expressed 1 as Baa where B is the acceleration co-efficient, 1; is the current net induced investment and 8C is the change in the demand for consumer goods (or consumption expenditure). If consumption spending changes by Rs. 50 crores and it leads to increase in induced investment by Rs. 125 crores, the co-efficient B will be determined as 2.5. Later the accelerator was broadly imerpreted ‘as a ratio of induced investment to a prior change in income or output. The investment has come to be related to the output on the ground ae ibe demand for capital goods cannot be derive son y from the consumption spending but the dive demand for them must also be taken into account. We start with the assumption that the esis capital stock (K,) is @ fixed proport apital goods is more 5. IM, Clark ; “Business Pp. 217-35. Fcaleranion and the Law of Pe Fetentiat output Senora we Bhan YO) 4M ap Kee ay, 18 fully ati ee , K,= By, If there is ney tir 4 tert tnt : Kus BY, : Substracting (41 from we get 2 Ki Kia = BY BY, or Ki Ky) BY, ~ Yo Mii) a et investment is capital stock, therefore KK, Substituting (iv) in (it k= BO - Ya) ot) This equation is understood as the acceleration equation and the acceleration co- efficient (B) can be determined as defined as a change in I (vy If an increase in output by Rs. 150 crores leads to rise in capital stock by Rs. 450 crores, It clearly signifies that the acceleration co- efficient in its rigid form is not much different from the marginal capital-output ratio or the capital co-efficient. In any time period, the volume of gross investment (1,) includes the net investment induced by an increase in demand ((,) and the replacement investment (I)- ehth ‘The replacement investment is a funstion reciation of replacement of OF the eee anger the tock of api the stock of capital. Larger the stook of PT Tanger willbe the demand fr capital goo the purpose of replacement and vce-verss Foard of Pore Econamy (March 191 MAGRO-ECONOMIC Anau In period 2, while Ys increases by 13.6% 4 the | THE te of depreciation oF te eels Langer ere ON ye oe - ¥ fie dy oe con omen cen 100 Ine a ee if the durability or ioe ee panged, amatter wil De jerine in eapital stock and induced invesimen, 6) do | of capital remains Wm iyent component, antl se eet falls by 1.7%, the ta in, 7 tol | Aa erg we te rate eepacetment, Hn petien) whe e that ected i | Sty te ever ean highly weed invenment. Ga relatively higher replacement co impact om net Induced in : rs consequently I, will be a significant ¢ ‘The variations in Ty ate relatively sma, é of Ip and the table shows that Tp has a stabixgg 3 ehth influence upon I, pau rly during contractigg a = PY, Vea) + Ky It also clear that the pattern a fluctuation in in Iethe aveelertion eoetficient is equ 10 | aad fis identical, Both peaks an rough of a 3), HSV, is Rs, 150 crores , the stock and ty oceur exactly in the same petod. Fog : of capital (K,) Is Rs. 350 crores and the his antilysis, the inference can be drawn th & j replacement co-efficient (a) is 1/5, the volume {j, ingiability of capitalistic conom sh jon of gross investment will be determined as : can be traced to the operation of the acceleration 3 SY; + aK; principle. 4 : S 150 + 1/5 x 350 The fixity of accelerator can be explained = 450+70=Rs. 520 crores in two situations. First, if the technical co. d Thus, a rise in output by Rs. 150 crores efficients are-fixed, there can be the relation of @ involves an increase in gross investment by proportionality between output and capital stock, Rs. $20 crores. Second, if the technical co-efficients are not a eration of the acceleration principle fixed (variable factor proportions), according can Pecunia through a hypothetical to Eckaus,° “the capital stock and Output change example. Il is supposed that the output of in equal proportions under the conditions of a automobiles in the inital period is Rs, 100 crores constant returns to scale”. These two situations a and each unit of output requires 2 units of capital in which acceleration co-efficient remainy <0 that acceleration co-efficient (B) is 2. Further constant are explained through Figs. 15-6 and the durability of an automobile is 10 years so 15-7 that durability co-efficient (a) is 1/10. The effect of variations in output upon gross and net © induced investment is shown through Table 15.2. TABLE 15.2 Hypothetical Changes in Output Stock and Tnvestment in the Automobile Industry (in Crores of Rs.) Fig 15.6 Fig 15.7 In Figs 15-6 and 15.7, capital (K) is jecusured along horizontal scale and labour (L) aeeitsured along the vertical scale. In Fig 15.6, assuming fixed technical co-efficient, the ‘soquants Y; and Y> are right angles. OR is the expansion path which indicate constant return to scale. At Tequired capital THEORIES OF INVESTHEWT doubled at Y>, the Caubled at Y2, the productio, doubled egtted capital a ake® Place at total outlay. the 7s Ben the facet also be factor pads tHe isocost Tne te the isocos variabl and Ya ac hallabour ratio, thee expansion pag tel sloping curves ones! Saeanson a : octopus are doubled, the So_gets doubled 1 inputs of labour an, pat are t line shifts to 1. Given the the eit of at Y) output are Ly doubled output ital have also to n Pectively and at th 22 {he tmputs of labour and cap ‘optimum level of output ot the efficient remains unchanged _,The simple or fixed accelerator theo: Seer is based upon the following i) The capital-ou i wes ate at (i) There is an al il aia asset ore Gi) The capital goods industries have surplus productive capacity. (i) The change in demand for output is to last permanently. 2 (v) The supply of funds is elastic. (vi) There is simultaneity between the production.and demand and the output and supply of inputs. It means there is absence of lags between them. All these assumptions are not realistic. ‘Therefore the fixed or simple acceleration theory cannot provide a proper explanation of the behaviour of investment. the 15.5. The Flexible Accelerator Theory ; The flexible accelerator theory which is a modification over the simple or fix acceleration theory was developed by H.B. Chenery’ and L.M. Koyck®. ‘The fixed accelerator theory was based wpe certain highly unrealistic assumpuiont ba absence of excess capacity 1n consumer ee s industries, constant acceleration co-efficies ‘Over Capacity 7. H.B. Chenery, rags and Ives 8. LM. Koyck, “Distributes

    You might also like