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Autonomous and Induced investment - The Investment Function, Macroeconomics | Macro Economics - B Com PDF Download

(i) Autonomous Investment:

Investment may be autonomous and induced. Usually, investment decision is governed by output and/or the rate of interest.

If investment does not depend either on income/output or the rate of interest, then such investment is called autonomous investment. Thus, autonomous investment is independent of the level of income

Autonomous and Induced investment - The Investment Function, Macroeconomics | Macro Economics - B Com

It is evident from Fig. 3.9 that, whatever the level of income, the level of autonomous investment has been fixed at OA. To describe this type of investment we have put a bar sign over the head of the curve I. Thus, autonomous investment, as per Fig. 3.9, is income-neutral.

 

(ii) Induced Investment:

Investment that is dependent on the level of income or on the rate of interest is called induced investment. Investment that would respond to a change in national income or in the rate of interest is called induced investment. Fig. 3.10 shows that, as national income rises from OY0 to 0Y1, (induced) investment increases from OI0 to OI1. Thus, investment that is income-elastic is called induced investment.

Autonomous and Induced investment - The Investment Function, Macroeconomics | Macro Economics - B Com

That is,

I = f(Y)

The slope of the investment line II is the marginal propensity to invest (MPl). MPl is the ratio of change in investment to the change in income. Or the ratio of increase in investment (A I) to an increase in income (A Y) is called MPl, i.e.,

MPL = ∆l/∆Y

Keynes believed that interest rate and the expectation of future profitability of investment projects are the two main determinants of investment expenditures in the short run. Investment is inversely related to the level of interest rate, i.e., I = f(r)

However, Keynes emphasised more on the expected yield of investment project. But expectations about the future profitability of investment are based on uncertain knowledge and, hence, such expectations are full of uncertainties leading to instability in investment expenditure.

It is to be pointed out here that Keynes was primarily concerned with autonomous investment and not with induced investment. However, in practice, it is very difficult to draw a line of demarcation between these two types of investment.

The document Autonomous and Induced investment - The Investment Function, Macroeconomics | Macro Economics - B Com is a part of the B Com Course Macro Economics.
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FAQs on Autonomous and Induced investment - The Investment Function, Macroeconomics - Macro Economics - B Com

1. What is the difference between autonomous and induced investment?
Ans. Autonomous investment refers to the investment made by firms regardless of changes in the overall level of income or economic conditions. It is influenced by factors such as technology, government policies, and business expectations. On the other hand, induced investment is influenced by changes in the level of income. As income increases, firms tend to invest more, and as income decreases, firms reduce their investment.
2. How does the investment function relate to autonomous and induced investment?
Ans. The investment function represents the relationship between the level of income and the level of investment. It consists of autonomous investment and induced investment. Autonomous investment is the initial level of investment that is not affected by changes in income, while induced investment varies with changes in income. The investment function helps in understanding how changes in income impact investment decisions.
3. What factors influence autonomous investment?
Ans. Autonomous investment is influenced by various factors. Technological advancements play a crucial role as firms invest in new technologies to improve productivity and competitiveness. Government policies, such as tax incentives or subsidies for investment, can also influence autonomous investment. Additionally, business expectations regarding future profitability and market conditions can impact autonomous investment decisions.
4. How does induced investment vary with changes in income?
Ans. Induced investment is directly related to changes in income. As income increases, firms tend to invest more in order to meet the rising demand for goods and services. This is because higher income leads to higher consumer spending, creating a favorable environment for businesses to expand their production capacity. Conversely, during periods of low income or economic downturns, firms reduce their investment to align with reduced demand.
5. How does the investment function contribute to overall economic growth?
Ans. The investment function plays a crucial role in driving economic growth. Increased investment leads to the creation of new capital goods, such as factories, machinery, and infrastructure, which enhance productivity and output. This, in turn, generates employment opportunities and higher income levels. As income rises, consumer spending increases, further stimulating investment and economic growth. Therefore, a well-functioning investment function is essential for sustained economic development.
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