Autonomous investments cause cyclical fluctuations in the economy through induction and multiplier using the accelerator. Autonomous investments together with induced investments are classified as New investments. What are the differences between these two types of investments? The neo-classic investment function can show this difference. The investment function in the general form is presented as follows :
- I = f(Y,i); f(Y)>0 and f(i)<0
- I = investment
- Y = income
- i = interest rate
Investments, which were initiated by raising the level of income and lowering the level of interest rates, are induced investments. Speculating that the income will remain unchanged in a short time, the investment function is definition in this way :
- I = f(i)
In the case of autonomous investments, the interest rate and the level of income are not basic factors influencing this investment. Factors that mainly cause autonomous investments are called exogenous factors. Changes in the economy affected by these factors include, inter alia:
- inventing of new products,
- invention of discovery of new raw materials,
- innovation in production technology,
- discovering of new markets,
- inventing of new production process,
- growth of population and its spending power,
- emergence of new entrepreneurs,
- expansion plan of the business firms,
- future expectations
- increase in public expenditure.
In general, the exogenous element is the result of public investment, a growing population or technological change. An autonomous investment is an aspect independent of the economic conditions, such as income and consumption, which currently exist.
This confirm by economist John Richard Hicks from Great Britain, for whom an autonomous investment presents growth factors related to technology development and population growth. It is an autonomous investment whose strength is expressed in the multiplier and which starts to increase production and employment. These investments grow with a constant percentage rate - that is assumes Hicks .
The economist John Maynard Keynes, in his theory admits that "autonomous investment is driven by the entrepreneurial "animal spirits" , comparing the expected returns the capital investment to the rate of interest. Induced investment is instead the response in terms of capacity creation to the expansion of output. The combination of the multiplier and the accelerator determines the investment output-relationship" ( D. Gualerzi 2009 s, 140).
Summing up the Definitions
Investments are a consequence of previous changes that have occurred at the level of consumption or income and which respond to an increase or decrease in total consumption demand. The reaction to changes, which occurring through an autonomous investment is an endogenous factor and the accelerator expresses this force . We assume that there is an equivalent system, disrupted as a result of the emergent growth of an autonomous investment. Then the outpoll and income goes up to the level determined by the multiplier, This increase in employment and increase in income will cause, thanks to the accelerator, induced Investments, which will then contribute to further induced investments, i.e. the accelerator and income growth, i.e. the multiplier and so on.
Simply put, the rise in autonomous investment is caused by increasing the growth of induced investments using interactions with the multiplier accelerator. This action will be continuous until it reaches the peak, which will be full employment. When the expansion changes to the highest level, the speed of this extension slows down to a normal pace. In this case, the rate of induced investments becomes smaller, because the factor of the autonomous investment was short-lived. Then the accelerator mechanism, as well as the multiplier mechanism, became the opposite. "falling investments that cut revenues, reduced revenues, reduced investments, and so on " (N. B. Ghodke, 1985, s. 577). However, it is not beneficial for the accelerator to drop down because it is not as energetic as when it increases. The accelerator is losing strength at the time.
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Author: Katarzyna Turek