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. ⦿On the basis of ownership of investment, it is divided into
two parts, i.e., private investment and public investment.
⦿ 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.
⦿Public 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. ⦿ Technological advance and innovation
⦿ Discovery of natural resources
⦿ Govt. policy
⦿ Foreign trade
⦿ Rate of population growth
⦿ Price level
⦿ Market structure
⦿ Availability of finance
9. Marginal efficiency of capital(MEC):
⚫The Marginal efficiency of capital is the highest rate of
return expected from an additional unit of a capital asset
over its cost
⚫If the value of MEC is high, more capital will be
invested and vice versa.
⚫For 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%
⚫Thus, the MEC is the % of profit expected from a
given investment on a capital.
10. Rate of interest :
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
• Capital stock increase MEC will decrease because of law of
diminishing returns.
MEC=ROI=Optimum capital stock
11. Demand forecast:
⚫The long-term demand forecast is one of the
determinants of investment decision.
⚫If the firms finds market potential for the product in the
long run, the firm will increase its investment
Level of income:
⚫If the level of income increases in an economy through
increase in money wage rate the demand for goods will
increase .
⚫This will induce to investment and vice versa.
12. Reduction in the rate of Interest
Reduction in Taxes
Increase in Government Expenditure
Price support Policy
Pump Priming
Policy of Wage Cut
Promotion of research
13. It is a great source of passive income
Brings financial Independence
It lets you follow your passion
Helps to beat inflation
Helps in economic development
