Induced and Autonomous Investment

Investment is an important determinant of the Aggregate demand and thereby of the level of income, output and employement.Investment is taken in the sense of real investment.

Investment refers to that part of the aggregate output which takes the form of new plants, new capital equipments and machinery, new structures (factories, office building, residential houses etc.) and addition to business inventories (stock of goods).

Private and Public Investment

Private Investment:

It refers to expenditure by private investors on the purchase of such goods which add to their stock of capital.

Investment implies increase in the stock of capital, also called Capital Formation.

Rate of interest is the principal determinants of private investment.

Higher rate of interest generally implies lower investment expenditure.

Investment in private sector is motivated solely by profit motive.

Public Investment:

Investment undertaken by the government is known as public investment.

The government often invest in projects like road, dams, schools, colleges, housing etc.

Public investment is largely motivated by public welfare.

Induced and Autonomous Investment

Induced Investment

Induced investment is that investment which is undertaken as a result of change in the level of income.

When the income of the consumer rises it leads to an increase in demand for consumer goodswhich leads to an increase in investment by the producers so as to increase the production of consumer goods.

Thus induced investment and level of income has a direct relation.

The below graph shows a positive functional relationship between income and investment.

induced investment

Income is plotted along the X-axis and Investment is shown on the Y-axis.

Curve I shows the amount of induced investment corresponding to various level of income. 

The curve I has a positive slope indicating that the amount of induced increases as the level of income increases.

As the income increases from OY₁ to OY₂, the level of induced investment increases from AY₁ to BY₂.

Thus the induced investment is income–elastic.

Autonomous Investment 

Autonomous Investment is that type of investment which is not affected by change in level of income or output.

The curve for Autonomous Investment I given in the below graph is a horizontal line parallel to X-axis, which indicates that the amount of investment is same at each level of income.

autonomous investment

Thus the autonomous investment is income–inelastic.

Autonomous investment may change due to factors other than income like innovation of new techniques of production, discovery of new markets, growth of population, increase in public expenditure, etc.

In Keynesian model of income determination we take investment as autonomous investment.