Macroambiente

stock of capital goods will tend to shift MEI to the left, and the lack will shift it to the right.

Cost of New Capital Goods

The purchase,, maintenance and operating costs of capital goods will affect the rate of profit, hence shift the investment demand curve. If these costs are high, investment will be discouraged and if they are low, investment will be encouraged.

Taxes

Tax is a cost of business. High profit tend to discourage investment while a reduction in taxes tends to encourage investment.

Expectations

Business typically undertake investment under uncertainty. The uncertainty is particularly relevant when some projects take a considerable length of time to mature. A person‘s perception of the economic future greatly influences the willingness to invest. Optimizing in terms of political stability, increase in demand, etc., tends to increase investment. Pessimism tends to reduce willingness to invest.

Technological Change

Changes in technology through new discoveries, inventions and innovations encourage new investments. For example, the introduction of high yielding cereals and tree crops has encouraged more farmers to invest in modern farming in Nigeria.

Increase in GDP

Investment is linked to GDP growth since it depends on aggregate demand.

Thus, a fast growth in GDP will exert pressure on aggregate demand, which in turn will encourage investment. In this case, the growth in investment demand is often faster than the growth in output. This relationship is referred to as the acceleration principle. A low growth rate, however, will cause investment demand to shift to the left.

Self Assessment Exercise

i. Explain clearly you understanding of Business investment expenditure

Fig: 3.1.1a The Investment Curve

Figure 3.1.1a shows that the level of investment spending is autonomous. i.e. it remains at the same level irrespective of income levels. Suppose I₀ = 2000. At Y₁ and Y_2, I₀ remains at 2000. This means that investment spending is independent of income changes, ceteris paribus.

0 Income

Figure 3.1.1b: The total investment Curve (induced plus autonomous investment)

The figure 3.1.1b above, represent the total or aggregate investment where I₀ is the autonomous and iY is the induced investment that is income elastic.

Self Assessment Exercise

i. Graphically explain and illustrate the investment function 3.3 Relationship between Savings and Investment.

Saving and Investment are jointly influence by the level of income, both on aggregate and individual household level. Saving is primarily determined by level of income, same to investment. These two variables are majorly linked together through aggregate level of income or household income on a microeconomic level.

I0

I = I0

I = Io + iY INVESTMENT

The algebraic relationship can be explained as follows:

S = f(Y) ...1 I = f(Y, r) ...2 Y = C + I ...3 Y = C + S ...4

From the above, equation 1 ... 3, imply that, saving, consumption and investment are respectively a function of income, while equation 5 and 6, simply expressed the fact that income earned is either consumed or invested, similarly, income earned is also consumed or saved.

Equality of Saving and Investment

Equate equation 3 and 4 above to have the following;

C + I = C + S ...5

Collect like terms to have the following equation;

C – C = S – I ...6 then 0 = S – I ...,7 therefore S – I = 0 imply S = I...8

Equation 8 is the require classical saving – Investment equality.

Self Assessment Exercise

i. In a clear term establish relationship between saving, consumption and investment.

4.0 CONCLUSION

This unit discussed the concept of investment expenditure to the students, under which different definitions of investment is put into use as well as the determinants of investment. Also two major types of investment were discussed and the function forms of these two types of investment were explained with curves. Students are also introducing to the concepts of average and marginal propensity to invest

5.0 SUMMARY

This unit looked at concept of investment which include the explanation of investment expenditure concept and graphical illustration of investment function.

It equally proof the classical equality of saving and investment at equilibrium.

6.0: TUTOR MARKED ASSIGNMENT

i. What is aggregate investment expenditure

ii. Evaluate the relationship between saving and investment iii. Explore the classical equilibrium of saving and investment.

iv. Explain the difference between I = I₀ and I = iY 7.0 REFERENCES

Attah B.O, Bakare, T.A. & Daisi, O.R., (2011); Anatomy of Economics Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria

Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western Publications Co. Cincinnafi, Oliso

Bakare –Aremu T.A, (2013); Fundamental of Economics Principles (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria

Bakare I.A.O, Daisi, O.R., Jenrola, O.A., & Okunnu, M.A., (1999): Principles and Practice of Economics (Macro Approach), Raamson Printing Press, Mushin, Lagos, NigeriaDennis R. A. et-al; International Economics, Mcgraw Hill Irwin, 8^th edition.

Familoni K.A, (1990); Development in Macroeconomics Policy, Concept Publications, Lagos, Nigeria

Fashina E.O, (2000); Foundations of Economics Analysis (Macro Theories), F.E.F International Company, Ikeja, Lagos, Nigeria

Jhingan M.L, (2010); Macroeconomics Theory, 12^th edition, Vrinda Publications (P) Ltd. Delhi, India

Jhingan M.L, (2010); International Economics, Vrinda Publications (P) Ltd.

Delhi, India

Lipsey R.G, (1979); An Introduction to Positive Economics, Hayper & Raw, London

Umo J.U, (1986); Economics; An African Perspectives , Johnwest, Lagos Nigeria.

Unit 2: TYPES AND DETERMINANT OF INVESTMENT