Difference Between Autonomous and Induced Investment

The construction of buildings, roads, dams, schools, colleges or purchase of machinery, buildings, factories, equipment, raw materials or other things that create income and employment in the country is called investment. It is expenditure on creation of new capital goods. It plays a vital role in the determination of equilibrium level of national income. The investment can be autonomous or induced. They explained below in detail.

Autonomous Investment

The investment which does not change with the change in income is called autonomous investment. It is independent of level of income. It is made for welfare of the society and not for making profits. This type of investment is generally undertaken by the government. Autonomous investment becomes essential when there is a situation of depression. In the period of depression, the economy suffers therefore the government makes investment in public utility works such as construction of roads and railways, discover of new resources and technologies or other investments that enhance or maintain the economic potential of a country. The level of autonomous investment remains same at all level of income. Let’s, understand it with the help of a table.      

From the above table we can observe that the level of income has gone up from Rs. 200 billion to Rs. 1500 billion, but the level of investment remains constant. This is representing the autonomous investment. The autonomous investment can also be explained with the help of a diagram.

As we see from the above diagram 2.5 that the level of income which is measured on the X axis is increasing but the level of investment which is measured on the Y axis remains constant. This is showing the autonomous investment. 

Induced Investment

The investment which respond to a change in income is called induced investment. It is dependent of level of income. This means that the induced investment is income elastic. The larger the income the higher is the investment. These investments are made with the intention of making profits. Therefore, this type of investments is generally undertaken by the private sector when they see a gap between the demand and supply. When there is a possibility of increase in income, the induced investment increases and vice versa. The induced investment can be abandoned anytime by the firm when it feels that the investment is no longer profitable. While on the other hand, the autonomous investments which have to be made despite it’s being unprofitable. Let’s understand the concept of induced investment through a table.

The above table shows as much as the level income is increasing the level of investment is also increasing. This is representing the induced investment. It can also be explained with the help of a diagram.

In the above figure 2.6 the level of income on X axis and the level of investment on Y axis has been measured. I-I is the induced investment curve. We can observe that as much as the level of income is increasing the level of investment is also increasing which is representing the induced investment.

Compare Autonomous and Induced Investment

1. Autonomous investment is income-inelastic. On the other hand, induced investment is income elastic.

2. Autonomous investment is determined by consideration of social welfare. Conversely, the induced investment is determined by consideration of profit.

3. Autonomous investment is related to government sector. While the induced investment is related to private sector.

4. In graphical representation the autonomous investment curve remains parallel to X axis. Inversely, the induced investment curve slopes upward or downward.