INVESTMENT

DEFINITION
In economics, investment means the new expenditure incurred on
addition of cpital goods such as machine,buildings, equipments etc.
In Keynesian terminology, investment refers to real investment which
adds to capital equipment
It leads to increase in the level of income, production and purchase of
capital goods
“By investment is meant an addition to capital, such as occurs when a
new house is built or a new factory is built. Investment means making an
addition to the stock of goods in existence.” (Joan Robinson)
 TYPES OF
INVESTMENT
1. AUTONOMOUS INVESTMENT
defined as the outlay of funds on capital formation, which is not dependent on the
change in the level of income, interest rate and rate of profit.
Government falls under this category because the investment made by the
government does not rely on the decisional profit or loss.
This investment depends more on population growth and technical progresss than the
level of income
This investment generally taken place in public utility services such as postal,
transport, infrastractures and communication.
AUTONOMOUS
INVESTMENT
SOURCES OF AUTONOMOUS
INVESTMENT
 SOURCES OF AUTONOMOUS
INVESTMENT
Taxation: Taxes are the primary source of government
revenue.

Loan: Loans are also one of the important sources of

public investment, as they facilitate the mobilization of
unused or idle money with the public.

Deficit Financing: Printing new money, i.e. currency notes

or Selling of Government bonds, so as to finance the
deficit, due to excess of expenditure over revenue, is a
deficit financing.
 INDUCED INVESTMENT

 Induced investment is that investment which is

affected by the change in level of income

 Induced investment is profit or income motivated

 prices, wages, interest changes and demand

affects profits influence induced investment.

 It is income elastic
 INDUCED
INVESTMENT
DETERMINANTS OF
INVESTMENT
 INTEREST RATE
 Investment is inversely related to interest rates, which are
the cost of borrowing and the reward to lending.

 inversely related to interest rates for two main reasons:

A. ) If interest rates rise, the opportunity cost of investment
rises- rise in interest rates increases the return on funds
deposited in an interest-bearing account, or from making a
loan, which reduces the attractiveness of investment relative to
lending.
B. ) If interest rates rise, firms may anticipate that consumers
will reduce their spending, and the benefit of investing will be
lost
 ECONOMIC GROWTH

 Economic theory suggests that, at the macro-economic level, small

changes in national income can trigger much larger changes in investment
levels.

 Firms invest to meet future demand. If demand is falling, then firms will cut
back on investment. If economic prospects improve, then firms will
increase investment as they expect future demand to rise.

 Accelerator theory. The accelerator theory states that investment depends

on the rate of change of economic growth.
 CONFIDENCE

 Confidence can have a considerable influence on

investment decisions

 investment is riskier than saving. Firms will only invest if

they are confident about future costs, demand and
economic prospects.

 Keynes referred to the ‘animal spirits’ of businessmen as a

key determinant of investment. Keynes noted that
confidence wasn’t always rational.
 THE EXPECTED RETURN ON THE INVESTMENT
 Investment is a sacrifice, which involves taking risks.

 This means that businesses, entrepreneurs, and capital

owners will require a return on their investment in order to
cover this risk, and earn a reward.

THE LEVEL OF SAVINGS

A high level of savings enables more resources to be used
for investment.

With high deposits, banks are able to lend more out. If the
level of savings in the economy falls, then it limits the amounts
of funds that can be channelled into investment.
 INFLATION

 In the long-term, inflation rates can have an influence on

investment.

 If inflation is high and volatile, firms will be uncertain at the

final cost of the investment, they may also fear high inflation
could lead to economic uncertainty and future downturn.

 Countries with a prolonged period of low and stable inflation

have often experienced higher rates of investment.
Thank you