3. ๏ In economics, investment means the new
expenditure incurred on addition of capital
goods such as machine, buildings
,equipment's, tools etc.
๏ In keynes view investment refers real
investment which adds to capital equipment.
๏ It leads to increase in the level of
income, production and purchase of
capital goods.
4. -Increase in capital stock is Investment.
I= Kt - Kt-1
Where,
I= Investment
Kt= Present capital stock
Kt-1= Previous capital stock
5. Induced investment: It is that
investment which is governed
by income and amount of
profit. It increases with the
possibility of income and
profit and vice versa.
Autonomous Investment: It is
that investment which is
independent at the level of
output or income. It is not
induced by income. It is not
made on the basis of changes
in come.
Investment
Y
O
Y
Income
I
I
Income
O
X
X
Investment
6. 1. Average propensity to invest
API= I/Y
where,
I= Investment
Y= Income
For Example,
Income = 40 lakhs , Investment = 4 Lakhs
API= 4/40 = 0.1
2. Marginal Propensity to invest
MPI= Change in Investment/Change in Income
I = 2 lakhs
Y = 4 lakhs
MPI = 2/4 = 0.5
7. โฆฟOn the basis of ownership of investment, it is divided into
two parts, i.e., private investment and public investment.
โฆฟ Private investment: it refers to that investment which is
made by private individuals with the sole objective of
earning profit. According to Keynes, it depends upon two
factors: i) MEC and
ii) Rate of interest. If MEC is greater than rate of
interest, more private investment will be made.
โฆฟPublic investment: It is that investment which is made by
the govt. of a country. Main objective is welfare of the
people, defence of the country and eco. Dev. It is not
induced by profit motive.
8. โฆฟ Technological advance and innovation
โฆฟ Discovery of natural resources
โฆฟ Govt. policy
โฆฟ Foreign trade
โฆฟ Rate of population growth
โฆฟ Price level
โฆฟ Market structure
โฆฟ Availability of finance
9. Marginal efficiency of capital(MEC):
โซThe Marginal efficiency of capital is the highest rate of
return expected from an additional unit of a capital asset
over its cost
โซIf the value of MEC is high, more capital will be
invested and vice versa.
โซFor example, If the supply price of a capital asset is
Rs. 10,000 and its annual yield is Rs. 2000, the
marginal efficiency of this asset is :
2000/10,000x100=20%
โซThus, the MEC is the % of profit expected from a
given investment on a capital.
10. Rate of interest :
๏ผ The interest rate is the percentage of the loan
amount that the lender charge to lend money.
๏Relation between MEC and ROI:
R
R1
K K1
ROI/MEC
Capital Stock
MEC
MEC ROI
โข Capital stock increase MEC will decrease because of law of
diminishing returns.
MEC=ROI=Optimum capital stock
11. Demand forecast:
โซThe long-term demand forecast is one of the
determinants of investment decision.
โซIf the firms finds market potential for the product in the
long run, the firm will increase its investment
Level of income:
โซIf the level of income increases in an economy through
increase in money wage rate the demand for goods will
increase .
โซThis will induce to investment and vice versa.
12. ๏ผ Reduction in the rate of Interest
๏ผ Reduction in Taxes
๏ผ Increase in Government Expenditure
๏ผ Price support Policy
๏ผ Pump Priming
๏ผ Policy of Wage Cut
๏ผ Promotion of research
13. ๏ผ It is a great source of passive income
๏ผ Brings financial Independence
๏ผ It lets you follow your passion
๏ผ Helps to beat inflation
๏ผ Helps in economic development
