What is Investment?

An investment is an asset or item accrued with the goal of generating income or recognition. In an economic outlook, an investment is the purchase of goods that are not consumed today but are used in the future to generate wealth. In finance, an investment is a financial asset bought with the idea that the asset will provide income further or will later be sold at a higher cost price for a profit.

Investment is elucidated and defined as an addition to the stockpile of physical capital such as:

  • Machinery
  • Buildings
  • Roads etc.,

i.e. anything that sums up to the future productive ability of the economy and changes in the catalogue (or the stock of finished commodities) of a manufacturer. Note that investment commodities (such as machines) are also part of the final commodities – they are not intermediate commodities like raw materials. Machines manufactured in an economy in a given year are not ‘used up’ to produce other commodities but yield their services over a number of years.

Investment decisions by manufacturers, such as whether to buy new machinery, rely to a large extent, on the market place rate of interest. However, for simplicity, we presume here that enterprises plan to invest the same amount every year. We can write the ex-ante investment demand as:

I = ī

Whereas, ī is a positive constant which represents the autonomous (given or exogenous) investment in the economy in a given year.

1 Mark Questions

Q.1-Define Investment.

It refers to the expenditure incurred by producers on the purchase of capital goods such as machinery, plant, etc.

Q.2-What is Autonomous Investment?

It refers to the investment which is made irrespective of income level. Instead of profit maximisation, it is made for social welfare. In general, it is made by the government.

Q.3-What is Induced Investment?

It refers to the investment which is made to earn profits. It is directly affected by a change in the income level.

Q.4-State the Determinants of Investment.

Marginal Efficiency of Investments (MEI) and Rate of Interest.


Rate of Return on Investment and Rate of Interest (i.e. Cost of Investments).

Q.5-Out of Induced Investment and Autonomous Investment, Which One is Influenced by the Level of Income?

Induced investment.

Q.6-Will a Firm Invest, if Its Marginal Efficiency of Investment is 10% and the Rate of Interest is 15%?

No, because of MEI<ROI.

Q.7-Give the Meaning of Ex-ante Saving.

It refers to the savings amount of households (or savers) plan to save at different levels of Income in the economy.

Q.8-Give the Meaning of Ex-ante Investments.

It refers to the amount of money which firms plan to invest at different levels of income in the economy.

Q.9-What Do You Understand by Ex-post Saving?

It refers to the realised or actual investment in an economy during a year.

Q.10-Will Ex-ante Saving Always Be Equal to the Ex-ante Investment?


Q.11- What Do You Understand by Ex-post Investment?

It refers to the realised or actual investment in an economy during a year.

The above mentioned is the concept that is explained in detail about Investment for Class 12 Macroeconomics. To know more, stay tuned to BYJUS.

1 Comment

  1. Ready to learn including the basics. Thank you.

Leave a Comment

Your Mobile number and Email id will not be published. Required fields are marked *