BACC19

BASIC MACROECONOMICS

The Investment
Theme:
Function Seminar
Investment and Macroeconomic Stability: How to Avoid Boom and
Bust Cycles
Investment
What is the meaning of investment?
In economics, investment means the new expenditure incurred on
addition to capital goods, buildings, equipment’s, tools etc.

In Keynes view, investment refers real investment which adds to

capital equipment.

It leads to increase in the level of income, production, and

purchase of capital goods.
Investment Expenditure
(Demand)
Investment
Expenditure It is the desired quantity of investment
(Demand) spending by firms across the economy on
physical capital and other resources for the
purpose of future productivity/profitability.

Depends on several factors, such as the

interest rate, the expected rate of return, the
level of income, the expectations about the
future, and the public policy.
 Two types of
Investment Function
Two types Autonomous Investment - is the portion of the total
of investment made by a government or other institution
Investment independent of economic considerations. These can include
government investments, funds allocated to public goods or
Function infrastructure, and any other type of investment that is not
dependent on changes in GDP.

Design Clipart
Induced Investment - is the type of investment that depends
on the level of income or output in the economy. It is
influenced by the demand for goods and services, and the
expectations of future profitability. Induced investment is
cyclical and responsive to changes in economic growth. It is
also affected by the interest rate, which shows the cost of
borrowing or the opportunity cost of investing.
Autonomous
Investment
Autonomous If investment does not depend either
Investment on income/output or the rate of
interest, then such investment is
called autonomous investment. Thus,
autonomous investment is
independent of the level of income.

It is evident from Fig. 3.9 that,

whatever the level of income, the
level of autonomous investment has
been fixed at OA. To describe this
type of investment we have put a bar
sign over the head of the curve I.
Thus, autonomous investment, as per
Fig. 3.9, is income-neutral.
 Induced
Investment
 Induced Investment that is dependent on the
Investment level of income or on the rate of
interest is called induced investment.
Investment that would respond to a
change in national income or in the
rate of interest is called induced
investment.

Fig. 3.10 shows that, as national

income rises from OY0 to 0Y1,
(induced) investment increases from
OI0 to OI1. Thus, investment that is
income-elastic is called induced
investment.
That is,
I = f(Y)
The slope of the investment line II is the marginal propensity to invest
(MPl). MPl is the ratio of change in investment to the change in income.
Or the ratio of increase in investment (A I) to an increase in income (A Y)
is called MPl, i.e.,
MPI = ∆l/∆Y

Keynes believed that interest rate and the expectation of future

profitability of investment projects are the two main determinants of
investment expenditures in the short run. Investment is inversely related to
the level of interest rate, i.e.,
I = f(r)
 Factors in which
Investment Depends
Factors in Marginal efficiency of capital (MEC) - is the expected rate
which of return on an additional unit of capital investment. It is the
Investment difference between the expected income and the cost of a
capital asset. MEC helps measure how much investment
Depends capital is worth the risk at a given return. MEC is influenced
by various factors, such as market conditions, competition,
and technological advancements.

I = f(MEC, i)
I – Investment Design Clipart
The market rate of interest - refers to the prevailing interest
rate offered on cash deposits. It is influenced by factors such
i - interest as central bank policies, supply and demand for credit, and
economic conditions. Borrowers pay this rate when taking out
loans, while lenders earn it on savings accounts or
investments. The market interest rate plays a crucial role in
shaping financial decisions and economic activity.
Marginal efficiency of
Capital (MEC)
Marginal Rate of return/ rate of profit

Efficiency
of Capital When Investment rises, MEC
tends to fall (I↑, MEC↓). These
Law of Diminishing return

(MEC) happens because of; Competition among firms

Investment MEC

P50 20%

P100 10%
The MEC is calculated by using the following formula:

The term R is called

by Keynes the
expected (prospective)
rate of return on new
investment (the
machine) and C0 is the
purchase price of the
machine.
Determination of
Rate of Interest
Determination Rate of Interest is the market ROI
of Rate of Determined through
Interest Demand (D) and Supply
(S) forces.
Demand Transactionary
Precautionary
Speculative
Supply Central Government
Central Bank
Commercial Banks
Equilibrium ROI Md = Ms
Determination I = f (MEC, i)
of Equilibrium Equilibrium Level of Investment
Level of
Resturns = Cost
Investment in
the Keynesian MEC = i
Theory When MEC = i Investment is in the
R=C Equilibrium level.

When MEC > i Investment is favorable.

R>C

When MEC < i Investment is unfavorable.

R<C
Example 1. Suppose you are planning to invest in an asset that costs P500,000. The expected cash flows from
this investment are as follows:
First Year: P200,000
Second Year: P200,000 (and zero thereafter)

If the market rate of interest is 5%, is it to your advantage to invest in that asset?
Example 2. Suppose a company is considering investing in a new equipment. The equipment cost P100,000.
The expected net yields (annual profits) from the project are as follows:
First Year: P30,000
Second Year: P35,000
Third Year: P28,000
If the market rate of interest is 6% per year with 3 years lifespan, is it to your advantage to purchase the asset?
QUIZ TIME!
1. It means the new expenditure incurred
on addition to capital goods, buildings,
equipment’s, tools etc.

A.Net income
B.Investment
B. Investment
C.Gross domestic product
2. Type of an investment function

A.Introduced investment
B.Introvert investment
C.Induced
C.Inducedinvestment
Investment
3. One factor in which investment
depends.

A.Marginal effectivity of capital

B.Marginal effectivity of GDP
C. Marginal efficiency of
C.Marginal efficiency of capital
capital
4. Type of an investment function

A.Anonymous investment
B.Autonomous investment
C.Automatic investment
5. What is our seminar about?

A.The
A. Theinvestment
investmentfunction
functionseminar
seminar
B.The investment function hall seminar
C.The investment seminar
BACC19 - BASIC MACROECONOMICS
Presents

THE INVESTMENT FUNCTION

SEMINAR
Investment and Macroeconomic
Stability:
How to Avoid Boom and Bust Cycles

03 | 22 | 24
THU 1 PM
Bukidnon State University
- Kitaotao Campus
Room 3
 SEMINAR April 5, 2024
SCHEDULE
1:30pm – 1:35pm opening remarks

1:35pm – 1:40pm
charish joy halangdon
glorybelle simela 1:40pm – 1:45pm
ice breaker
introduction of the speakers:
Justine monica daan |
sunshine ucab | pearl
Investment and Macroeconomic

AN Stability:

and Bust Cycles

How to Avoid Boom

INVESTMENT IN 1:45pm – 2:00pm TOPIC 1: INVESTMENT

KNOWLEDGE PAYS 2:00pm – 2:15pm topic 2: TYPES OF INVESTMENT:

INDUCED

THE BEST
INVESTMENT | AUTONOMOUS INVESTMENT

2:15pm – 2:30pm topic 3: factors in which investment

depends

INTEREST. 2:30pm – 2:45pm topic 4: determination of rate of

- Benjamin Franklin interest

2:45pm – 2:50pm clarifications

2:50pm – 2:55pm quiz

2:55pm – 3:00pm closing remarks