Investment Function 2

CHAPTER 6

Prepared by: Jalilah Gunti Jeanylove Larrobis BSBA- Marketing II

A. INVESTMENT: A DETERMINANT OF INCOME

Investment as a process of buliding up the capital

stock, the expenditure for which determines income and production.

Investment expenditure is capital spending mainly derived not from current income and consumption but from accumulated savings and other sources external to the circular flow.

INVESTMENT AND THE MULTIPLIER

The term investment multiplier refers to the concept

that any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy. The multiplier attempts to quantify the additional effects of a policy beyond those that are immediately measurable.

Equations that illustrate how the investment factor is incorporated in the income function with the multiplier process:

∆y= IM where: ∆Y= I+∆C y= income Since, C= consumption Y=C I= Investment therefore: M= Multiplier

y= C+∆C+1 ∆= Change y= C +I

B. Investment and Output Businessand household investment tend to increase

the economy's stock of capital and total output; where as depreciation has a opposite effect as it represents capital consumption.

INVESTMENT AND THE STOCK ADJUSTMENT PROCESS

The investment-production time lag, sustained investment patterns can determine trends in the capital stock and production level over a long period.

Kᶠ= ( Kᵢ - D + I)

Yᵢ= (Yᵢ -∆yᵈ + ∆yᵢ) = a(Kᵢ - D+I)

where: Kᶠ = stock of capital after depreciation and

investment Kᵢ = Initial stock of capital D = depreciation I = Investment Yᵢ = Initial output from the capital stock Yᶠ = Total output from the capital stock after

depreciation ∆yᵈ = Change in total output because of depreciation ∆yᵢ = Change in total output because of investment a = Output-capital ratio(Y/K)

SAVINGS AS THE SOURCE OF INVESTMENT

Savings is the unspent portion of income during the period intended for spending as in the case of a salary earner who sets asdie a portion of his half-month pay earmarked for the next fifteen days.

S = Y- C where: S= savings Y= Income C = consumption

SAVINGS-INVESTMENT EQUILIBRIUM

The saving-investment equilibrium further implies that increasing, decreasing, or maintaining the level of investment expenditure will respectively increase, decrease or maintain the level of income and savings assuming ceteris paribus.

DETERMINANTS OF SAVINGS

Part of national income that available for spending goes to savings which is inversely related to the corresponding level of expenditure. Savings and expenditure have common determinants as one can be traded for another in the same pie.

Determinants are: Price level Population growth