Monday, August 24, 2009

Induced Investment

Investment which varies with the changes in national income is called induced investment. Changes in national income bring about changes in aggregate demand which in turn affects the volume of investment. When, for instance, national income increases, aggregate demand too increases. Investment has to be under taken to meet this increased demand. This induced investment is income elastic i.e. it increases as income increases and versa.

Induced investment is investment not only in fixed capital but also in inventories which is undertaken to enable the economy to produce a larger output in order to meet increased demand. Induced investment is made by the people as a result of changes in income level or consumption. It is also influenced by price changes, interest changes etc. which affect profit possibilities. It is under taken for the sake of profit or income and it changes with a change in income. Thus induced investment is governed by profit motive. It is sensitive to change in income i.e. it is income-elastic.

As income is shown along 0X and investment 0Y. The investment curve it has been shown as rising upwards to the right. This means that as income increases, investment also increases and as income decreases investment too decreases.

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