In Keynesian terminology, Investment refers to real investment which adds to capital equipment. It leads to increase in the level of income and production by increasing the production and purchase of capital goods. Investment thus includes new plants and equipment , construction of public works dams , roads , buildings , etc...
In other words of JOAN ROBINSON , " By Investment is meant an addition to capital , such as occurs when a new house is built or a new factory is built. Investment means making an addition to the stock of goods in existences.
Capital , on the other hand , reefers to real assets like factories, plant, equipments and investment of finished and semi-finished goods.
TYPES OF INVESTMENT :
Induced Investment :
Real investment may be induced investment is
profit or income motivated. Factors like price , wages , interest change which
affects profit and influences induced investment. Similarly , demand also
influences it. When income increases, consumption demand also increases and to
meet this, investment increases.
Autonomous Investment :
Autonomous investment is independent of level of
income and is thus income inelastic. It is influenced by exogenous factor like
innovation, invention, growth of population and labour forces, researches,
social and legal institution, weather changes, war, revolution, etc....
DETERMINANTS OF THE LEVEL OF INVESTMENT :
The decision to invest in a new capital
asset depends on whether the expected rate of returns on the new investments is
equal to or greater or less then the rate of interest to be paid on the funds
needed to purchase this asset. It is only when the expected rate of return is
higher than the interest rate that investment will be made in acquiring new
capital assets
Keynes sums up these factors in his concept of the marginal efficiency of capital
( MEC)MARGINAL EFFICIENCY OF CAPITAL :
The MEC is the highest rate of return expected from an additional unit of capital assets over its cost. In the words of KURIHARA, " Its is the ratio between the prospective yield of additional capital goods and their supply price."
MARGINAL EFFICIENCY OF INVESTMENT :
The marginal efficiency of investment is the rate of return expected from a given investment on a capital asset after covering all its costs, except the rate of interest. like the MEC, it is the rate which equates the supply price of a capital assets to its prospective yield. The investment on an asset will be made depending upon the interest rate involved in getting funds from the market. If the rate interest is high, investment is at a low level. a low rate of interest leads to an increasing investment. Thus the MEI relates investment to the rate of interest.
FACTORS OTHER THAN THE INTEREST RATE AFFECTING INDUCED INVESTMENT :
1. Elements of Uncertainty.
2. Existing stock of capital goods.
3. Level of Income.4. Consumer Demand.
5. Liquid Assets.
6. Invention and Innovations.
7. New Products
8. Growth of Population.
9. State Policy.
10. Political Climate.
CONCLUSION :
Thus these are all about the investment function
in economy.
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