INDUCED AND AUTONOMOUS INVESTMENT

The classification of the investment into the induced and the autonomous investment is important in the macro economic analysis.The investment that depends upon the profit expectations of the entrepreneurs is called the induced investment. The entrepreneurs produce or place orders for the capital goods, when they expect brisk sales of the goods  produced with the help of these capital goods. Such anticipation depends upon the level of income and the effective demand of the consumers. An increase in the level of income causes an increase in the level of employment and thus an increased demand for the consumer goods. This in turn, results in an increase in the investment. This positive functional relationship between the income and the investment is explained graphically in Figure 4.1.


 
In this figure, the income is shown on the horizontal axis, while the investment is plotted along the vertical axis. The level of investment rises from Y1I1 to Y2 I2   in response to an increase in income from OY1 to OY2. Thus, the induced investment is income elastic. The higher is the level of income, the higher will be the investment. Besides income, the induced investment also depends upon the innovations, technology, the government policy, the size as well as the composition of the population, etc. The size of induced investment rises for each level of income with new innovations, favourable changes in the government policies, increase in the size of population and vice-versa.

The autonomous investment is not affected by the level of income or the rate of interest. The level of autonomous investment depends upon social, economic and political conditions in the country. Exploration of new resources, technological improvements and rise in the population raises the size of autonomous investment. Most of the investment made by the government in the public utilities (social and economic overheads such as railways, roads, electricity, posts and telegraph, etc.) belongs to this category, since the investment decisions of the government are not simply motivated by gains or losses. On the other hand, the private investment may or may not be autonomous. As the autonomous investment is income inelastic, its curve is parallel to the X-axis. It is diagrammatically shown in Figure 4.2, which indicates that the amount of  investment remains the same at each level of income. This curve may shift upwards (or downwards) depending upon the technology changes, the discovery of new resources, the growth of population, the government budget allocations for investments, etc.
 


The aggregate investment can be obtained by adding up the induced and the autonomous investment. Political stability raises the size of both autonomous as well as induced investment including direct foreign investment in the country.
  

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