If any government or company or individual incur any kind of disbursement for making or buying new assets, it will be called Investment Expenditure. Constructing or buying new physical capital assets can be machinery, equipment, building, or any type of asset for the company or organization.
National income’s fundamental component is the investment. It helps to know the equation of national income and employment.
When the term “Investment” is formally used in economics it simply means “the expenditures incurred on the purchase of new physical capital assets.”
Classification of Investment Expenditure:
Autonomous Investment Expenditure:
This expenditure is not made for profit purpose. It is independent of the goods’ demand. Neither does it depend on any current production statistics. Rather it is for the development of any organization.
For example, if the government constructs canals, bridges, hospitals, schools, universities, roads, etc, then this is Autonomous Investment Expenditure. Because these are part of the economic development and infrastructure of the country. Or if any Bank constructs multiple branches in different cities, this is its own asset and is for its own development thus it is Autonomous Investment Expenditure.
Explanation: You can in the graph that when the national income is OY1 the autonomous investment is $10 billion. As National income increases, autonomous investment doesn’t change. And when national income is OY2, the autonomous investment is same i.e. 10billion. Which means that autonomous investment is independent of National Income.
In case, if new technologies come or the sales grow more, the producer operates to full capacity. Here the autonomous investment is influenced. Its curve goes up from 10billion to 15billion dollars.
Autonomous investment does not influence the changes in National Income. That is the autonomous investment is independent of the level of national income.
Then what does influence it? Well, it is influenced by many basic factors. For example, an increase in population, Manpower and the role of interest. It is mostly influenced by the level of technology, the role of capacity utilization and the expectations of future economic growth.
While the investment in demand for the products or current level of production is regarded as Induced Investment.
The output of the economy directly influences the investment. The large the national income, the higher is the investment. Change in investment is called Induced Investment. As national income changes, investment changes.
Explanation: Induced investment is the increasing function of profit. You can see in the graph that the higher the level of national income, the higher is the level of induced investment.
The investment function defines that Real National Income directly proportional to the Inducement Investment. Which means that if real National Income increases, the level of inducement investment also increases. Or if Real National Income decreases, the level of Inducement Investment also decreases.
Financial investment: The investment expenditure for the purchase of goods, leads, shares, securities or bonds, etc. is called Financial Investment.
Real investment: The investments which improve productivity are called Real Investments. The example can be the investment expenditure the purchase of new capital goods like machinery, tourism places, roads, industries, power projects, etc.
Why they? Because these things will improve productivity. Roads will result in generating great revenue. Tourism places will attract tourists around the world. Power projects will increase productivity.
Gross investment: Gross Investment sums up all the expenditure on acquiring new capital assets. For example, the entire expenditure of Real Investment which is for the purchase of new capital goods like machinery etc.
Net investment: If you deduct depreciation charges from the existing capital assets’ value, you will get Net Investment expenditure.
The formula for the calculation of Net Investment:
Net Investment = Gross Investment – Depreciation charges
Classifications of capitals and assets
Stock or Inventories:
If any business purchases new raw material, semi-finished goods or unsold goods in the stock, they are called inventories. The raw material or semi-finished material means that the material the company will use for its products.
For example, if a car company purchases tires, engines, and basic tools, they are raw materials. Because these materials are unfinished goods which company will use them for the construction of its products i.e. cars.
The assets which are necessary for any company, for example, machinery vehicles, and houses facilities, etc., are also included in fixed Capital, and its expenditures are included in investment.
“Investment means real investment which refers to an increase in the real capital stock of the economy”. – J.M. Keynes
Earned income can be used for any type of expenses, savings, consumptions or maybe for further investments as well. Here consumption expenditure refers to the sustainability of humans. You can say it is for foods and clothing and other daily livings. While saving can refer to future investments. You give your money to Bank for savings so that it may need you in your future hard times.
When you give your money to the bank, the bank doesn’t just keep it. Bank lends it to other people, organizations or anyone who would like to take. Bank gives money on interest and thus earns from it. For example, the Bank gives housing loan to individuals. Bank gives big loans to industries. Even you will see that governments take loans from banks.
Individuals take loans to start their businesses. Industries take loans to invest in their new features. Both set up their business and earn and return the loan after making the businesses stable.
For example, developing countries take loans from Banks for the construction of roads, bridges, canals, and the whole country’s infrastructure like spending on education and healthcare etc. Not only this, many rich people like Reliance, Tata, Birla, and Adonis run their businesses and industries out of loaned money. This is called investment expenditure.
Eventually, investment expenditure will generate more revenue and employment for the country. For example, if any developing country takes the loan and construct industries, industries will open jobs and thus unemployment issue is resolved. With the passage of time, industries will rise and eventually they will return the loan but set up their business.