Difference between Autonomous and Induced Investment | Autonomous investment is not affected by changes in income, output, profit and sales levels. Induced investment is generally affected by these factors, and that is the important difference between these two types of investment.
Investment can be understood as the share of a person’s income that is spent into a financial scheme with the aim of generating further capital assets. When making an investment, the following factors should be considered:
- Fund safety
- Level of Risk and Uncertainty
- Return on investment
- Marginal Fund Efficiency
Investments are preferred over deposits because they earn higher returns, depending on the safety of the funds and guaranteed returns. From the point of view of the economy as a whole, there are two types of investment: Autonomous Investment and Induction Investment.
Also read: The difference between saving and investing
Definition of Autonomous Investment
Autonomous investment can be defined as the expenditure of funds for capital formation that is independent of changes in income levels, interest rates and profit rates.
Basically, investments in public utility services such as post, transportation, communication, infrastructure, etc., made by the Government fall into this category because the investments made by the government do not depend on profit or loss decisions.
It is an investment made by the government in any development project regardless of its economic growth rate or future prospects of generating good profits, but with the aim of increasing the effective level of demand in times of depression and unemployment. The amount of autonomous investment is influenced by factors such as:
- Technical change
- Population increase
- Budget allocated for investment
- Changes in the weather
- Conditions of war and peace
- Search for new resources.
That is, it is these factors that can shift the slope of autonomous investment up or down.
Here are some sources of autonomous investment:
- Taxation: Taxes are the main source of government revenue. The amount collected from the public in the form of taxes is spent on providing public utility services.
- Loan: Loans are also an important source of public investment, as they facilitate the mobilization of unused or idle money with the public. People deposit their funds in banks, so banks have large funds that are mobilized by lending to the public at interest.
- Deficit Financing: Printing new money, i.e. paper money or selling Government bonds to finance the deficit due to excess spending over income is deficit financing. This is one of the easiest methods of autonomous investment, but because it increases the flow of money in the economy, it can lead to inflation.
What is Induced Investment
Induced investment usually means the expenditure of funds on fixed assets and stocks which are needed when the level of income and demand for goods increases in an economy.
In simple words, induced investments are investments that differ according to income, i.e. the more amount an individual or company has, the more they will spend. So, we can say that this is a function of income.
As we said earlier, induced investment is directly related to national income, so when national income increases, the demand for goods and services tends to increase. And to meet the ever-increasing demand, the supply of goods and services needs to be increased. Therefore, increasing economic activity requires more investment.
Therefore, national income and induced investment are directly related, i.e. when national income falls, induced investment also decreases and when the former increases, the latter also tends to increase. Apart from income, investment driven is also influenced by technological innovation, government policies, integration and population structure.
Also read: Difference Between Income and Profit
This determinant of Induced Investment is mainly determined by two factors:
Marginal Capital Efficiency: The highest expected rate of return from the ancillary project, i.e. the capital asset above its cost. The determinants are:
- Prospective Results
- Supply Price
Interest rate: Interest rate refers to the rate at which interest is charged for the use of money. When money is invested to buy capital assets, the interest must be written off. This is determined by the demand and supply of money, based on two factors:
So, the greater the liquidity and preference, the higher the rate of return and vice versa.
Difference between Autonomous and Induced Investment
- Autonomous Investments are investments that remain unaffected by changes in income levels, interest rates and profit rates. In contrast, induced investment is an investment that is positively related to income, output, and profit levels.
- In terms of elasticity, autonomous investment is said to be income inelastic, because the volume of autonomous investment remains constant at all income levels. In contrast, induced investment is income elastic, because the investment quantum increases as the level of income increases.
- While autonomous investment is not related to national income, induced investment is positively related to national income. This is because autonomous investment remains unchanged or unaffected by changes in income, but induced investment tends to increase or decrease with changes in income.
- Autonomous investment is carried out by the government with a social welfare perspective. In contrast, induced investments are made with the profit motive in mind. It can also be said that profits encourage investors to invest.
- Induced investment is influenced by endogenous variables such as production factor prices, wages, consumer demand, existing capital stock, the level of stock exchange activity and interest changes. But on the other hand, autonomous investment is influenced by exogenous variables, such as innovation, invention, government policy, political stability, population growth, research, labor movement, etc.
- Autonomous investment is not influenced by consumer demand for goods and services, instead it affects demand. On the other hand, demand is one of the factors that influence induced investment, ie if consumption demand increases, investment is made to meet demand by supplying goods and services.
Speaking of curves, the autonomous investment curve is always parallel to the X axis, while the induced investment curve, sloping upwards to the right shows a positive functional relationship between income and investment.
Autonomous Investment Curve
As you can see in the image, the income increases from M1 to M2 but the investment amount remains constant, at both levels. So, in the case of autonomous investment, the investment quantum remains the same at each income level.
Induced Investment Curve
As you can see in the figure, when the income level increases from M1 to M2, the investment amount also shifts from I1 to I2 which indicates that the investment is positively related to the income level. Therefore, the curve is pointing up and sloping to the right. So the induced investment is income elastic, meaning that when the level of income is high, investment will also increase.
Suppose the total capacity of the company is able to produce 500 units of output from 100 machines. Now, if the company invests in changing existing machines, with more advanced machines that can produce 500 units of output out of 10 machines. This is said to be an autonomous investment, because there is no increase in capacity.
In other words, if the company needs to expand capacity, to meet the anticipated increase in demand for 1,000 units. Therefore, an additional 500 units of output capacity will require another 100 machines, to be installed, to meet the demand. The investment made in such a case would be an induced investment.