∑E = ∑O = ∑Y
That element of a factor (variable) which is influenced by the level of Y. E.g. the level of income the government receives from tax (personal income). As the income level increases → so does government tax receipts.
Investment (I), is defined as the purchase of new capital goods which add to the stock of capital. Capital goods are those produced not to satisfy consumer wants directly but for increasing the level of production in the future. Capital consists of items such as factories, machinery and railways.
- Autonomous I. refers to that formation motivated by reasons independent of changes in consumer demand indicated through income. This I. is undertaken in 'expectation' of a profit to be derived in the future.
- Induced I. refers to that capital formation motivated by increased consumer demand or income.
- If the I. function is given by: I = 50 + 0.1Y, it means that autonomous I is 50 and is undertaken irrespective of the level of Y, and induced I. is 10% of the level of Y. If Y equalled 1000 then I. would be 150.