Page 125 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Self Assessment

State whether the following statements are true or false:
11. According to Accelerator theory, the level of new investment is determined not only by
level of output or GNP but by rate of change of national income.

12. When GNP is rising rapidly then investment will be at a low level.
13. Aggregate expenditure function is the sum of consumption and investment function.
14. An investment function may shift upwards due to a rise in interest rate.

15. An investment function may shift downwards due to a fall in MEC.
6.4 Summary

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.
Business firms make investment in order to make profits. These decisions are usually
influenced by the following factors: the rate of investment, the marginal efficiency of
capital (or the yield), the cost and productivity of capital goods, business expectations,
profits, process innovations, product innovations and the level of income.

According to the accelerator theory of investment, the level of new investment is
determined not only by level of output or GNP but by rate of change of national income.
It is based on the fact that the capital stock of a nation is considerably greater than its GNP.

6.5 Keywords

Autonomous Investment: It is the level of investment independent of National output.
Gross Investment: Total investment in an economy during a certain period.
Induced Investment: Business investment expenditures that depend on income or production
(especially national income or gross national product).
Investment: It refers to that part of current output which makes a new addition to the existing
stock of capital.
Marginal Efficiency of Capital: It is the annual percentage return on the last additional unit of
capital.

Net Investment: A measure of a company's investment in capital, found by subtracting non-cash
depreciation from capital expenditures.
Replacement Cost: The amount it would cost to replace an asset at current prices.

6.6 Review Questions

1. Define the term 'investment'. Describe different types of investments.
2. How does an investment function relate to consumption function?

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