Autonomous Investment

Induced Investment

National Income

Inve

stm

ent

I`I

National Income

Inve

stm

ent I`

I

C = R1/1+r + R2/(1+r)2 + R3/(1+r)3 + ....... + Rn/(1+r)n

C = SUPPLY COST OR THE REPLACEMENT COST

R= ANNUAL PROSPECTIVE YEILDS FROM THE CAPITAL ASSET

r = MEC

Period OutputIncome

Required Stock of Capital

CapitalReplacement

Net Investment

Gross Investment

t -1 500 1500 300 0 300

t 510 1530 300 30 330

t + 1 525 1575 306 45 351

t +2 550 1650 315 75 390

t +3 575 1725 330 75 405

t + 4 575 1725 345 0 345

t +5 560 1680 345 -45 300

Kt = Stock of Capital for time t

Net Investment = Kt – Kt -1

Gross Investment = Capital Replacement + Net Investment V = Constant

Here, we take the Value of V as 3

ASSUMPTIONS: -

1. CAPITAL OUTPUT RATIO WILL ALWAYS BE CONSTANT.

2. DEPRECIATION THAT TAKES PLACE IN THE STOCK OF CAPITAL WILL BE 1/5 TH OF THE STOCK EXSISTING IN THE PREVIOUS YEAR, THUS, 1/5 TH OF THE STOCK OF THE CAPITAL SHOULD BE REPLACED EVERY YEAR.