Prepared by: Jalilah Gunti

Jeanylove Larrobis
CHAPTER 6 BSBA- Marketing II
A. INVESTMENT: A DETERMINANT OF
INCOME

Investment as a process of buliding up the capital

stock, the expenditure for which determines income
and production.

Investment expenditure is capital spending mainly

derived not from current income and consumption but
from accumulated savings and other sources external
to the circular flow.
 INVESTMENT AND THE MULTIPLIER

The term investment multiplier refers to the concept that

any increase in public or private investment spending has
a more than proportionate positive impact on aggregate
income and the general economy. The multiplier attempts
to quantify the additional effects of a policy beyond
those that are immediately measurable.
Equations that illustrate how the investment
factor is incorporated in the income function
with the multiplier process:

∆y= IM where:
∆Y= I+∆C y= income
Since, C= consumption
Y=C I= Investment
therefore: M= Multiplier
y= C+∆C+1 ∆= Change
y= C +I
 B. Investment and Output

Businessand household investment tend to increase the

economy's stock of capital and total output; where as
depreciation has a opposite effect as it represents
capital consumption.
INVESTMENT AND THE STOCK
ADJUSTMENT PROCESS

The investment-production time lag, sustained investment

patterns can determine trends in the capital stock and
production level over a long period.
 Kᶠ= ( Kᵢ - D + I)
Yᵢ= (Yᵢ -∆yᵈ + ∆yᵢ) = a(Kᵢ - D+I)
where:
Kᶠ = stock of capital after depreciation and investment
Kᵢ = Initial stock of capital
D = depreciation
I = Investment
Yᵢ = Initial output from the capital stock
Yᶠ = Total output from the capital stock after
depreciation
∆yᵈ = Change in total output because of depreciation
∆yᵢ = Change in total output because of investment
a = Output-capital ratio(Y/K)
SAVINGS AS THE SOURCE OF INVESTMENT

Savings is the unspent portion of income during the period

intended for spending as in the case of a salary earner
who sets asdie a portion of his half-month pay
earmarked for the next fifteen days.

S = Y- C
where:
S= savings
Y= Income
C = consumption
 SAVINGS-INVESTMENT EQUILIBRIUM

The saving-investment equilibrium further implies that

increasing, decreasing, or maintaining the level of
investment expenditure will respectively increase,
decrease or maintain the level of income and savings
assuming ceteris paribus.
DETERMINANTS OF SAVINGS

Part of national income that available for spending goes to

savings which is inversely related to the corresponding
level of expenditure. Savings and expenditure have
common determinants as one can be traded for another
in the same pie.
Determinants are:
Price level
Population growth