INVESTMENTS

CONTENTS: Meaning Classifications Propensity Determinants of Induced Investment Investment Function Measures to stimulate Private Investment Sources of Public Investment Importance of Investment

1. MEANING OF INVESTMENT The term Investment means purchasing of different kinds of shares and stocks and investing capital in such activities as are likely to yield income. According to keynes: The term Investment ,is used to mean real investment. It means addition made to the existing capital asset which results in an increase in employment. Thus, investment is the expenditure incurred for real capital formation. It includes 3 kinds of items: Building of new machines & capital equipments Construction of new buildings Increase in stocks.

DEFINITIONS: In words of KEYNS, “ Investment, thus defined included therefore the increment of capital equipment.” According to Stonier and Hague, “By investment we do not mean the purchase of existing paper securities bonds, debentures or equities but the purchase of new factories, machines and the like.”

2. CLASSIFICATION OF INVESTMENT 2.1 Induced and Autonomous investment Induced investment: It is governed by income & amount of profit. Induced by changes in income and profit. Induced investment is found in private sector. In words of prof. keiser,” When an increase in investment is due to increase in current level of income & production, it known as investment.”

Induced investment is expressed in fig Induced investment is expressed in fig.1, income is shown on OX- axis & investment is shown on OY-axis. II curve represent induced investment. It slopes upward signifying that investment increases when there is increase in income. Y I Induced investment INVESTMENT O X INCOME I Figure 1

Autonomous Investment: It is that investment which is independent of level of income or output. It is not induced by income. Fig.2 explains the concept of autonomous investment. Y II is autonomous investment curve. It is an horizontal straight line parallel to OX-axis, signifying that there will be no change in investment whether income increases or decreases. AUTONOMOUS INVESTMENT I I X O Figure 2

2.2 Private & public investment 1) Private Investment: it refers that investment which is made by private individuals with the sole objective earning profit. It depends on two factors : a) Marginal efficiency of capital & b) rate of interest. This kind of investment is induced investment. 2) Public Investment : Public investment is that investment which is made by the central provincial of a country. It is not induced by profit motive. 2.3 Gross & Net Investment 1) Gross Investment: Total expenditure incurred on capital goods at any given time in an economy is called gross investment. It includes two type of investment: a) Net b) Replacement investment. Hence, Gross investment = Net + Replacement Investment

2) Net Investment : Net investment is that investment as a result of which there is increase in capital stock. Gross investment minus replacement investment is called net investment. Net investment = Gross – replacement investment 3. Propensity to Invest Propensity to invest is the ratio between aggregate investment & aggregate income. PI = I/Y (Here PI = Propensity to invest ; I = Investment ; Y= Income) 3.1) Kinds of Propensity to Invest a) Average Propensity to invest: It is the ratio of total income & investment. b) Marginal Propensity to invest: It is the ratio of change in investment & change In income.

4. Determinants of Induced Investment “The inducement to invest is determined in Keynes’ analysis by the businessmen’s estimation of the profitability of investment in relation to the rate of interest on money for investment. The expected profitability of new investment is called the marginal efficiency of capital” It is induced by following two factors in private sector: 1) Marginal efficiency of capital & 2) Rate of interest Marginal efficiency of capital: It refers to the expected profitability by the use of one more unit of capital. It depends upon two factors: a) Prospective yield: It means that net income which is available during the full life-time of that machine.

2) Rate of interest: Interest is the cost of money invested. b) Supply price: It refers to the cost of a machine, but it is not the cost of existing machine but that of a brand new machine. It is also called Replacement cost of that machine. 2) Rate of interest: Interest is the cost of money invested. According to keynes, “Interest is the reward for parting with liquidity.” Higher the rate of interest, Greater will be the keenes on the part of people to part with liquidity & lower the rate of interest greater will be their preference for liquidity. RATE OF INVESTMENT & MEC Figure 3 In this figure , investment is shown on OX-axis & marginal efficiency of capital& rate of interest, on OY-axis. RR curve represent rate of interest &MEC curve represent marginal efficiency of capital. Supposing, rate of interest OR is fixed, as such RR curve represent fixed rate of interest . When amount of investment is OL1 , then MEC is greater than AL1 rate of interest. Hence, more investment will be made. It will increase to OL. In this situation, MEC intersects RR curve at point E. i.e., MEC=OR. After it, there will be no inducement to investment. Y MEC=R E 1 MEC>R E E 2 R R A B MEC<R MEC X L L O L 2 1 INEVESTMENT

5. Investment function Investment function refers to the functional relation between investment & its various determinants. According to Prof. Peterson, McConnell & Norman F.Keiser etc., In a capitalist economy investment is mainly influenced following factors: Technological Advance & Innovation Discovery of Natural Resources Government policies Foreign Trade Political Environment Expectations Rate of Population Growth Territorial Expansion The Price level The Market Structure

6. Measures to Stimulate Private Investment Level of employment is very much influenced by changes in investment. Hence to achieve the objective of full employment, stimulating of private investment is very essential. Following suggestions are made to stimulate private investment: Reduction in the rate of interest Reduction in taxes Policy of wages cut Increase in government expenditure Price Support Policy Abolition of monopolistic tendencies Promotion of research Pump priming

7. Sources of Public Investment Public investment plays significant role in the economic development of a country. Government can increase or decrease it. Being autonomous nature public investment should be directed towards public works activities comprising of houses, hospitals, etc. In order following are the important sources of public investment. Taxation Loans Deficit Financing

8. Importance of Investment In the words of Peterson, “Investment plays a key role in determining current levels of income & employment.” Determination of Income & Employment Volatile Factor Economic Development. Conclusion – After reading so much about investments we can conclude that, in every economy, investment plays a key role in achieving objectives of economic development & full employment. Therefore is the under-current of growth in national income.