Page 88 - DECO402_Macro Economics

Unit-10: Investment Function

∆K or I = K – K 0 Notes
t
t
t
Here, ∆K is the change in capital stock in certain time period t, the mean of K is the capital stock in
t
t
last of duration t ko is capital stock in beginning duration. It is known gross investment in the last
of duration t.
It is not necessary that the gross investment done in capital investment in economy, because one
part of new capital will necessary for the establishment of depreciated capital stock. The expenditure
on the establishment of depreciated capital during year is known as replacement investment. It is
important for maintain the present stock. So, net investment can get to subtract capital investment
and replacement investment from gross investment. In other words, to get the net investment, the
amount of present total structure and producers invested in producing the production of period and
durable equipment are subtracted from gross investment. Briefly,
net investment = gross investment—replacement investment
Or pure investment = net investment + replacement investment.
When gross investment is only sufficient for keep the capital stock intact, then net investment is
equals to the zero. Here gross investment is similar with the amount of capital to spend during period.
But when economy is in the grip of recession, new investment symptoms is disappoint. The stock
of non-saleable goods are collect in the environment of recession and investor becomes reluctant to
take loss for the establishment of depreciating capital equipment. When resolution investment is less
then the replacement necessity, then its difference is disinvestment. It shows the reduction in the
stock of capital. net investment is only possible, when gross investment is more than the replacement
investment. net investment is not only the stopper for development, but it put economy to recession,
so people become handle more tremendous strain.

2. Financial Investment and Real Investment

Financial investment means devaluate the authority form one person to another. By this real capital
stock of economy is not increase. For example, bank deposit, home by one person, present shares,
debentures, and bonds are not generating some thing new. In it only involve the devolution of the
authority from one person to another, but total capital of economics is unchanged. When one buyer
invested, then other is disinvested. Investor gets some returns by this investment. But, there is no
investment for economies.

Notes When gross investment is only sufficient for keep the capital stock intact, then net
investment is equals to the zero.

Apposite it, real investment created more production capacity in economy. The construction of new
industry and workshop are the examples of real investment. That work of investment is not only
important for that, but also important for economy. Keynes used that investment in national income
analysis. It is important for attention that when one person purchases new shares of a company, then
different investment will be the indicator of real investment.

3. Planned Investment and Unplanned Investment

Investment is known as planned and intended investment, which inspired the deliberate for expand
the present stock by the establishment of an extra instrument or increment in the materials tables. It

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