Induced And Autonomous Investment

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Induced And Autonomous Investment

Another important classification of investment is between induced and autonomous investment.

Induced investment is that investment which is undertaken as a result of a change in the level of income or consumption. It depends on profit expectations. Entrepreneurs purchase or produce capital goods when they anticipate high level of sales of final goods. This anticipation depends upon the level of income and the level of effective demand of consumers. An increase in the level of income leads to an increase in the level of employment and in the demand for consumer goods. This, in turn, results in an increase in investment. Thus, increased investment increases or decreases with the increase or decrease in the level of income. This functional relationship between income and investment could also be explained by means of a diagram.

In, income is measured along the X-axis and investment along Y-axis. It represents induced investment curve. As income increase from OY1 to OY2, the level of induced investment increases from Y1E1 to Y2E2. So, the larger the income of the community, the higher will be the induced investment. Hence, induced investment is income-elastic.

Autonomous investment refers to that kind of investment which is not affected by the changes in the level of income or output and is not induced solely by profit, motive. Autonomous investment is not a function of output or income. It is related to the technological development, discovery of the new resources, growth of population etc. On each level of income, autonomous investment remains unaltered. In it is autonomous investment which remains constant at each level of income. Hence autonomous investment is income-inelastic.

It should, however, be noted that autonomous investment does not always remain fixed or constant. It may be fixed at a point of time but may change over time. The government may increase this investment in future by undertaking new proper as construction of roads. bridges, etc.

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