Page 50 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 3: Theories of Income, Output and Employment: Classical Theory

Figure 3.9 Notes
Y
Real S
R/I IE<SE

X
O Saving

If, however, SE outweighs IE the saving curve is upward sloping (Figure 3.9).

Real ROI and Investment

There are two determinants of investment (in capital goods) – expected future earning and real
ROI. Future earning is the return and ROI is the cost. The investor while taking investment
decision compares return with cost. It is desirable to invest so long as future earning is greater
than, or at least equal to, real ROI.

The model assumes future earning to be fixed. This makes investment as a function of real ROI.
Since ROI is the cost, lower the real ROI more profitable it is to undertake investment. This
establishes inverse relation between real ROI and investment. It means that the investment
function curve is downward sloping (Figure 3.10).
Figure 3.10
Y
Real
R/I

I

X
O I

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