1.

Define investment. What are the elements of determining the Investment?

Answer»

Investment, in economics, signifies nothing but addition to capital. It is defined as the surplus of total production over total consumption. Investment is necessary for increasing the production capacity in the economy. According to Mrs. Joan Robinson, “By investment is meant an addition to capital, such as occurs when a new house is built or a new factory is built. Investment means making an addition to the stock of goods in existence.”

Determinants of Investment: Investment primarily depends upon two factors :

  1. Expected rate of profitability or Marginal Efficiency of Capital (M.E.C.),
  2. Rate of Interest or Cost of Investment.

A rational businessman will invest only if M.E.C. is more than the rate of interest. On the contrary, if the rate of interest seems to be greater than M.E.C., then there will be no inducement to invest.


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