Investment Function

Investment Function:

Investment has a particular meaning in economics. This means additions to the existing productive capacities (i.e., stock of fixed inventories and capital). They comprise fixed machinery, equipments, building, raw materials, substitution due to depreciation, and so on. It lays down the basis for future generation. Investment is the key in structural component of total expenditure or aggregate spending.

Through investment, Keynes means real investment, not the financial investment. Investment is the addition to actual capital assets. This does not mean the buy of bonds or shares that are financial investment. The distinction among consumption and investment is elementary in Keynesian theory. Significance of investment as a component of aggregate demand occurs due to the fact that it is other major component.

Consumption is a steady function of income. Therefore it was not possible to modify aggregate demand by modifying consumption expenditure as it based on income. Keynes found that investment is an independent expenditure determined independently of the degree of income. He found it to be the main cause for instability and variation in income and employment. The global depression of 1930s was also caused by a drop in investment.

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