MCom I Semester Business Environment Investment Notes Study Material

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MCom I Semester Business Environment Investment Notes Study Material

MCom I Semester Business Environment Investment Notes Study Material :  Meaning of Investment Definition of Investments Importance of Investment Types of Investment  Factors Affecting Investment Determination of Investments Investment Trends in India Causes of Slow Investment  Rate in India Long Answer Question Short Answer Questions Objective Questions ( Most Important Notes for MCom Students  ) :

Investment Notes Study Material
Investment Notes Study Material

CTET Paper Level 2 Previous Year Questions Answer Language I English ( 2011 )

Investment Capital

Capita Investment is an important indicator of economy. Investment refers to that part of saving which increases capital fund. The part of income which is used for the establishment of new industries, capacity enhancement, building, and for other infrastructural development is investment.

MEANING OF INVESTMENT

It may be stated that the meaning of investment is different from the common use of the word. One often hears of a person investing money in buying shares of company or buying an existing bond or property or title to property. These are fincancial transactions and are merely transfers of assets from one person to another. It is an investment by one and disinvestment by another and as such, such transactions cancel out. They do not constitute real investment since they do not add to the nation’s physical stock of capital.

Investment includes addition to the inventories as well as to fixed capital investment and in this sense does not refer to the total stock of capital existence but not addition to this capital over a period of time, a year.

DEFINITIONS OF INVESTMENT

Investment is defined by the authors in the following ways:

(1) According to Prof. Keynes, “Investment means an addition to the nation’s physical stock of capital like the building of new factories, new machines as well as any addition to the stock of finished goods or the goods in the pipelines of production.”

(2) Mrs Joan Robins opined, “Investment refers to the addition in the existing stock of capital goods.”

(3) In the words of Nurkse, “Formation of capital implies that society uses its present production not only for the satisfaction of its present consumption but also uses a part or capital goods that is making machines, transport facilities or other production equipments.

(4) According to Benham, “The amount a country adds to its capital during a period is known as capital formation during that period.”

Thus, investment in the present context does not mean the purchase of existing securities, bonds, shares, debentures etc. Such transactions do not add to the existing capital but merely mean a change in ownership of the assets already in existence. Like savings, investment may be individual and social.

IMPORTANCE OF INVESTMENT

Capital is an essential fountain of national wealth. It is the chief instrument of increasing production and productivity. The importance of investment can be put as under:

1 Solving problem of balance of payment : Increased investment promotes exports and solves the problem of balance of payments. Import substitution is also possible by increasing the stock of capital.

2. Helpful in production and employment generation : By adding to the stock of capital an economy is in a better position to enjoy the advantages of large scale production and increased specialisation. Investment plays an important role in raising productivity. In order to increase production capacity and employment, capital is required.

3. Extension of market : Capital formation helps in the extension of market and rapid growth of industrialisation.

4. Utilisation of resources : Investment plays an important role in exploitation of natural resources and as a result, national income increases.

5. Helpful in capital formation : Investment helps in capital formation in an underdeveloped country.

TYPES OF INVESTMENT

Types of investment are as follows:

1 Gross and net investment : Real capital means to create or acquire more and more plants, machines, equipment etc. The use of a country’s resources to produce, create or acquire such capital is called investment. In the theory of income and employment it means net investment and not gross investment. Investment may be counted on the gross or net basis. Net investment is gross investment minus depreciation.

2. Financial investment : Financial investment is a form of personal investment. Purchase of existing securities, bonds, shares, government bonds etc. are financial transactions and is known as financial investment.

3. Real investment: Real investment means the purchase of new factories, plants and machines. Only newly constructed assets create employment or generate income.

4. Inspired and autonomous investment : Investment which varies with the changes in national income is called inspired investment. Changes in national income bring about changes in aggregate demand which in turn affects the volume of investment. Inspired investment is made by the people as a result of changes in income level or consumption. It is also influenced by price changes, interest changes etc. which affect profit possibilities. Thus, inspired investment is governed by profit-motive. It is sensitive to changes in income, i.e., incomeelastic.

Autonomous investment depends more on population growth and technical progress than on anything else. Such investment is done by the State as necessitated by the population growth and facilitated by technical progress and not as a result of change in national income.

5. Planned and non-planned investment : When the investment is undertaken for planned economic development it is planned investment. Or, if it is undertaken for the sake of future profit or income. When the investment is undertaken for the utilisation of savings only, it is called non-planned investment.

Another classification of investment may be private or public investment. Private investment is done by private individuals. It is influenced by marginal efficiency of capital and interest rate while public investment is done by the State or local authorities. In the public investment profit motive does not enter.

FACTORS AFFECTING INVESTMENT

There are a large number of factors which determine the level of investment. Some of them are as follows: 1,0000 @ To 1000

1 Marginal efficiency of capital (M.E.C.): The marginal efficiency of capital refers to the expected profitability of a capital asset. It is the highest rate of return over cost expected from the additional unit of a capital asset. When a businessman invests, he expects profit from investment. He must compare the rate of interest which he has to pay and the rate of profit that he expects to obtain. So long as the expected rate of profit exceeds the rate of interest, investment will continue to be made. In other words, marginal efficiency of capital is the rate at which prospective yield of an asset is discounted so as to make it just equal to the supply price or replacement cost of the asset.

2. Government policies : Government policies related to industry, business and finance are the most important factors which determine the level of investment in economy. If government policies are favourable to the business, investment will be promoted.

3. Rate of interest and profit : The rate of interest along with profit determines the volume of investment. A low rate of interest tends to stimulate investment. If the expected rate of profit is high, it is better to invest more. The rate of interest is deliberately lowered down by the monetary authority to encourage investors to invest more.

3. Peaceful atmosphere : Peaceful atmosphere is an ideal situation for investment. Some political events such as threat of war, success of a particular party in election etc., and other instable factors such as terrorism etc. also aftect the volume of investment in economy.

4. Technical reasons : An improvement in production techniques in industry very often gives fillip to new investment on part of entrepreneurs. For example, a new invention or a new discovery in production techniques may necessitate the installation of costly machinery or plant in an industrial enterprise.

5. Other factors : There are some other factors that affect investment such as personal attitude of entrepreneurs, future expectations, political incentives, level of education, availability of experts etc.

6. Investment facilities : Other incentives for the investment are the developent of banking facilities, insurance, transportations, communication systems etc. If these facilities are available in plenty in an economy, the volume of investment would move upwards.

Investment Notes Study Material

DETERMINATION OF INVESTMENT

Inspired investment is influenced by the internal factors such as income level, changes in income level, propensity to consume, stock of fixed assets, while autonomous investment is influenced by the external factors. Autonomous investment does not vary with the level of income. Most of the investment undertaken to promote planned economic development comes under autonomous investment. Autonomous investment depends more on population growth and technical progress than on anything else.

Investment in an economy depends on two factors, viz, (a) the marginal efficiency of capital; and, (b) the rate of interest, Keynesian Economics is concerned with the short period. The factor determining investment, namely the rate of interest, more or less is sticky. The rate of interest does not change much. Therefore, it is the marginal efficiency of capital or expected rate of profit which determines the volume of investment in a community. There is no doubt that business expectations play a very important role in determining marginal efficiency of capital and therefore investment. There are two types of the prospective yields of capital assets-short-term expectations and long-term expectations.

The short run expectations are based on existing facts which are more or less certain such as the size of existing stock and the intensity of consumers’ demand. The short term expectations influence internal factors like profit, demand, price, income, rate of interest etc. The long-term expectations are influnced by the external factors such as population growth, innovations, foreign trade, political situation etc.

INVESTMENT TRENDS IN INDIA

Sectoral Variation in Gross Domstic Investment: In India, at sectoral level the rate of gross capital formation or simply the investment rate has increased in both the public and private sectors. In the former it rose continuously from 9.4 percent in 2008-09 to 8.0 percent in 2013-14 whereas in the latter, it increased from 24.8 percent in 2008-09 to 23:3 percent in 2013-14.

Table

Sectoral Variations in Gross Domestic Investment (GDI) in India

CAUSES OF SLOW INVESTMENT RATE IN INDIA

The low rate of investment in India has been the result of the interaction of various economic, social and cultural factors that have been operating in these countries for a long period. Some of those factors are as follows:

(1) Small size of market.

(2) Lack of entrepreneurship.

(3) Low level of income.

(4) Low propensity to save.

(5) Rapid increase in population.

(6) Lack of infrastructural facilities.

(7) Economic backwardness.

(8) Lack of education.

(9) Rural economy.

(10) Lack of technical Knowledge.

EXERCISE QUESTIONS

Long Answer Questions

1 What is meant by investment ? Explain the main basis of investment.

2. Explain the difference between average investment and marginal investment.

3. Define investment and suggest measures to raise investment in India.

4. Describe in brief the trends of investment in India.

5. Define investment and describe why investment rate is low in India.

Short Answer Questions

1. What do you understand by investment?

2. Write the types of investment trends.

3. Define the investment.

4. What is the importance of capital formation in the Indian economy?

5. Clearly differentiate between financial investment and real investment.

6. What is the relationship between savings and investment?

Objective Questions

Select the Correct Alternatives :

1 The cause of low rate of investment in India is :

(a) Lack of entrepreneurship

(b) Low rate of savings

(c) More consumption

(d) All of above.

2. Investment is influenced by :

(a) Autonomy

(b) Gross domestic savings

(c) Technique

(d) None of these.

3. The purchase of securities or titles, bonds, shares, debentures etc. of existing companies is known as:

(a) Real investment

(b) Financial investment

(c) Net investment

(d) All of above.

4. Quantitative increase in investment is :

(a) Financial investment

(b) Real investment

(c) Gross and net investment

(d) All of above.

5. The important indicator of an economy is :

(a) Investment

(b) Saving into the

(c) Net income

(d) National income.

[Ans. 1. (a), 2. (c), 3. (b), 4. (a), 5. (a).]

Investment Notes Study Material

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