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Unit 6: Investment

excess of revenue over (capital) expenditure or return is the maximum over the period of that Notes
investment. In setting up a management consultancy firm, for example, investment will be
made in acquiring professionals. In most cases, they are very expensive. The product, here
would be the service provided by these professionals in solving a client's problem. Revenue
will come from the sale of their services. Accordingly, capital would be required to set up such
an organisation. In this unit, you are going to learn about various types of investments and
factors that affect investment decisions.

6.1 Meaning and Types of Investment

Investment refers to that part of current output which makes a new addition to the existing stock
of capital. It is a flow variable because it is not the total stock of capital but the net addition made
thereto, with respect to time.
Like consumption, investment depends on many variables. For simplifying our analysis we
assume that investment is given independently of the level of income. Thus investment is a
constant, I .
0
Since investment is assumed to be constant at the I level, the investment function is
0
I = I (I > 0)
0 0
Where I represents a given positive level of investment.
0

Example: Suppose investment equals 80 crores. With investment on the vertical axis
and income on the horizontal axis, the investment function is plotted as a straight line parallel
to the horizontal axis as in Figure 6.1 which shows that investment does not vary with the level
of income. Thus, investment is 80 crores regardless of the level of income.
Figure 6.1

Types of Investment

The various types of investment are:
Gross Investment: Total addition to capital stock.

Replacement Investment: A part of gross investment which is used for replacing old
capital equipment.

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