Induced investment and Autonomous investment

Induced investment is that investment which is governed by income and amount of profit. The inducing factors are changes in income and profit. Where there is a possibility of increase in income and profit, the induced investment increases and when there is a decreased possibility of income and profit, the induced investment decreases. This implies that the induced investment is profit and income elastic. In simple language, when increase in investment is due to the increase in current level of income and production, it is known as induced investment. The relations of the income/ profit and investment are shown by the below graph.

The graph shows that at very low level of income / profit, the induced investment may be negative also. Autonomous investment is that investment which is independent of the level of income or profit. Thus, it is not induced by any changes in the income. The investments which are made with the aim of introducing new techniques, new inventions etc. or enhance the level of effective demand during the period of depression and unemployment are kept in the category of autonomous investments. Thus, the autonomous investment is generally associated with:

  • Introduction of new techniques of production
  • Development of new resources
  • Growth of population
  • Depression or recession.

In the graphical representation, the autonomous investment remains parallel to the Income/ profit axis as shown in the below graph.

There will be no change in investment whether the income increases or decreases. Please note that autonomous investment does not vary with variation in income. It does not mean that autonomous investment does not change at all. The autonomous investment can be increased and decreased any time, notwithstanding the changes in income or profit. Thus, in such changes, the I-I curve in the above graph will shift either upward or downward.

The above discussion also leads us to conclude that the autonomous investment is not determined by consideration of profit. Instead, it is determined by consideration of the social welfare. In the times of economic depressions, the governments try to boost the autonomous investment. Thus, autonomous investment is one of the key concepts in welfare economics.