Distinguish between autonomous and induced investment ?

Answer :

Autonomous investment is that type of investment which is not affected by change in the level of income or output .Therefore, it is income inelastic. However, autonomous investment may change in non – income factors like innovation of new techniques of production, discovery of new markets, growth of population, etc.

Induced investment, on the other hand, is that investment which is undertaken as a result of change in the level of income. It varies directly with the change in the level of income.

To know What is investment ?

Distinguish between private and public investment?

Also read : Induced and Autonomous Investment

Derivation of Investment Multiplier Formula

The multiplier formula can be derived by using the simple equilibrium condition for the two sector model i.e  

Y = C + I 

When there is an increase in investment by (∆I), it will lead to increase in income (∆Y) and this induces increase in consumption (∆C) i.e

∆Y = ∆C + ∆I 

Since, change in total consumption (∆C) equals change in income multiplied by MPC (marginal propensity to consume, “c”)

∆Y = c∆Y + ∆I

∆Y - c∆Y = ∆I

∆Y(1-c) = ∆I

∆Y = ( 1 / 1-c)  ∆I 

∆Y/ ∆I = 1 / 1-c

Graphic Presentation of Multiplier

Investment multiplier can also be explained with the help of the a diagram, as shown below:

investment multiplier

1) Income is shown along the X axis and Aggregate demand on Y axis.

2) The initial equilibrium is at point A, When AD = C + I

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.

Aggregate Demand and its components

In macroeconomics, AD (aggregate demand) refers to demand for all goods and services in the economy during a period of time (generally, one year).

AD is measured in terms of expenditure on all the goods and services in the economy during a period of time.

Simple Keynesian model of income determination states that an economy’s total income in the short – run is determined by desired aggregate demand or aggregate spending of the people. The more is the desired demand of the people, more amount of goods and services that firms can sell. The more goods and services firms can sell, the more output they will like to produce and more workers they will employ.

Components of AD

Aggregate demand is the total amount of goods and services demanded in the economy. It refers to the desired intended or planned demand or spending by the people, i.e. the total amount of goods and services they would like to purchase.