Types of Investment


(1) Gross and Net Investment:

            The total amount of expenditure made on capital assets is called gross investment which includes depreciation. On the other hand deduction of depreciation from gross investment creates the net investment. In the theory of income and employment, investment means net investment, not gross investment.

(2)  Private and public Investment:

            The investment made by the private investors or entrepreneurs are called private investment. It is influenced by marginal efficiency of capital and the rate of interest. Private investment is profit motive. If the marginal efficiency of capital is more than the rate of interest, then the investment will increase and if marginal efficiency of capital is less than the rate of interest, then the investment will decrease. On the other hand, the investment made by government or various bodies of government is known as public investment. In public investment, public benefit or service is only concerning matters more than the profit. Investment in construction of roads, bridges, canals, hospitals, educational institution, transportations, communication sectors, health oriented sectors, etc., are the examples of public investment. Thus, public investments are made for social welfare rather than for earning profit.

(3)  Induced and Autonomous Investment.

  • Induced investment:

The investment which is affected by the changes in level of income is set to be induced investment. Real investment may be induced. Induced investment is profit or income motivated. Factors like prices, wages and interest changes which affects profits and influence induced investment. Similarly, demand also influences it. When income increases, consumption demand also increases. In the ultimate analysis, induced investment is a function of income, i.e., I = f (Y), where, I refers investment and Y refers level of income. It is income-elastic. It increases and decreases with rise or fall in income as shown in figure below:

In the figure, II is the investment curve which shows induced investment at various levels of income. Induced investment is zero at OY0 level of income. When income rises to OY2, induced investment is I2Y2. A fall in income to OY1 also reduces induced investment to I1Y1.

Induced investment may be further divided into (i) The average propensity to invest, and (ii) The marginal propensity to invest.

(i)   The average propensity to invest is the ratio of investment to income, i.e., I/Y. If income is Rs. 40 crores and investment Rs. 4 crores, I/Y= 4/40 =0.1. In terms of the above figure, the average propensity to invest at OY2 income level is I2Y2/OY2.

(ii) The marginal propensity to invest is the ratio of change in investment to the change in income, i.e., DI/DY. If the change in investment, DI =Rs. 2 crores  and the change in income, DY = Rs. 10 crores, then DI/DY = 2/10 = 0.2. In above figure, DI/ DY = I2a/Y1Y2.

  • Autonomous Investment:

Autonomous investment is independent of the level of income and is thus income-inelastic. It is influenced by exogenous factors like innovations, inventories, growth of population and labour force, researches, social and legal institutions, weather changes, war, revolution, etc. But, it is not influenced by changes in demand. Rather, it influences the demand. Investment in economic and social overheads whether made by the government or the private enterprise is autonomous. Such investment includes expenditure on building, dams, roads, canals, schools, hospitals, etc. Since investment on those projects is generally associated with public policy, autonomous investment is regarded as public investment. In the long-run, private investment of all types may be autonomous because it is influenced by exogenous factors. It can be shown in diagram.

In figure, autonomous investment is shown as a curve parallel to the horizontal axis as I1I1 curve in above figure. It indicates that at all levels of income. The amount of investment OI1 remains constant. The upward shift of the curve to I2I2 indicates an increased and steady flow of investment at a constant rate OI2 at all levels of income.

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