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
Y= I+C
Since,
Y=C
therefore:
y= C+C+1
y= C +I

where:
y= income
C= consumption
I= Investment
M= Multiplier
= Change

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.

K= ( K - D + I)
Y= (Y -y + y) = a(K - D+I)
where:
K = stock of capital after depreciation and investment
K = Initial stock of capital
D = depreciation
I = Investment
Y = Initial output from the capital stock
Y = Total output from the capital stock after
depreciation
y = Change in total output because of depreciation
y = 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