Functions of investments in the economy: definition, types and examples

It is impossible to talk about finance, entrepreneurship, business and not mention some essential terms. For example, to build the right economic formulas it is necessary to understand what are the functions of investment, how they work and what role they play for the development of the entire industry.

Essence, types and examples

In the well-known theory of Keynesianism, investment and, above all, investment costs are an integral part of the aggregate expenditures of the population, along with state purchases and net exports of goods and services. Economists consider it to be the most volatile and dynamic component due to its dependence on many factors. If we look more deeply at investments (functions, types, their significance, methods of application), then it is necessary to go beyond the framework of this theory.

What is meant by investments in a broad sense?

Investigation of the concept of investment is devoted to the scientific works of the classical, Keynesian, marginalist Marxist and other schools. Let us dwell in more detail on three definitions.

Investments (in a broad sense) are investments in the economic sectors, the scientific and technical sector, infrastructure, social and environmental measures, in the development of production and entrepreneurship.

Investment in a narrow sense

From the point of view of finance, the functions of investments are reduced to the investment of assets (assets), which are used in the process of production and economic activity.
The economy treats investments as expenses of subjects with the purpose of capital accumulation, providing for the creation of new capital and reimbursement of worn-out assets. From this side, the main function of investment is to generate income. In other words, the subjects of the national economy invest part of their income in the development of the economy so that it will pay off and return to them in an increased amount.

Entrepreneurs also view the investment as an economic operation to acquire production and non-productive funds and financial instruments in exchange for property or cash. At the same time, investment spending can help increase capital or maintain it at the previous sufficient level.

Although the share of investment expenditures in the total national expenditures is one-fifth, it is up to them that fluctuations in business activity and positive growth of the economy depend - other things being equal, an increase in investments proportionately increases the gross domestic product.

Functions of investments in the economy

From the definitions of investment, it can be seen that these processes can be carried out both at the state and private level of the business entity, but in the final analysis it all comes down to improving the welfare of the state. So, the functions that fulfill the investment are designed to satisfy all stakeholders: households, banks, enterprises, formal and informal institutions, associations, the public sector. Let's highlight four key properties that make investment a cornerstone of macroeconomics:

• The distribution function is interpreted as follows: choosing where to invest money or assets, the entrepreneur or the state contributes to the development of one industry more than the other. For example, it looks like this: with foreign electronics and cars, domestic can not compete, it is more profitable for an entrepreneur to invest money in something else.
• Regulatory property: investments are carried out globally and affect related sectors of the economy. The new plant involves the laying of roads, a recreation center, the creation of new jobs, etc.
• Stimulating: investing involves investing money in improvement. Science, technology, and the level of education are being optimized, and as a result, the quality of life and welfare of the country is improving.
• Indicative: the property of investment, closely related to the processes of capital building and maintaining the balance of the open economic system.

Having considered the theoretical aspects of the formation and functioning of investments, we turn to their graphical representation, which clearly shows how the function of consumption, the function of investment, saving and consumption on the scale of the state's economic system are related.

Definition

Any function, mathematical or economic, is the dependence of the final result on one or many factors. Investment functions are also models in which the endogenous variable (the end result) is investment expenditure, and the exogenous variable is determined by the research objectives.

If the independent variable is one, then the other is said to be "under other specified conditions." So, if the investment is given a function of income, it means that the interest rate and the prices in this period have not changed significantly.

The more independent variables, the higher the reliability of the model and its proximity to the real conditions of the economy. The dynamics of changes in variables can be very different at different periods, and to simplify the task, researchers choose one or two main factors on which the functions of the investment will depend.

Interrelation of investments and interest rate

Without exaggeration, we can say that the size of the investment depends on the interest rate, while the change of the other factors takes on the function of autonomous investments included in the multifactorial model, which has the following form:

• I = Ia - d * r (1), where
  
  I - total investment costs;
  Ia - autonomous investment costs;
  D - the sensitivity of the investment to a decrease or increase in the rate,%;
  R is the real interest rate.

The value of the interest rate is explained quite simply. Every businessman, before investing in a risky enterprise (and 100% of risk-free investments does not exist in principle), estimates how much he can earn on it and how much it needs to be spent. For large-scale investments, domestic financial resources are often not enough, and the entrepreneur is sent to a bank or non-bank financial institution that requires a price for its services - the same percentage. The higher the bank's price, the lower the profit of the businessman and the ratio of profit to cost. As you know, maximizing profits from all activities is the ultimate goal of any enterprise.

Other examples

We must understand that there are a huge number of ways to use such a tool as investment. The income function, for example, is constructed taking into account this financial operation. In addition to loans and non-bank loans for the purchase of equipment, machinery or financial instruments, an entrepreneur can spend money from his own pocket. At the enterprise, this is part of the profits that remained after the payment of taxes and other planned deductions. In this case, the fluctuations in the final amount of investment expenditures will directly depend on the change in the function of the operating income of the enterprise. The profit grows and its consumed part - investments are increasing. Growing losses - investment is reduced or curtailed for an indefinite period. Then the investment function has a form significantly different from the previous example, since we add the total revenue.

The marginal propensity to invest is a multiplier, which shows how much the investment increases or decreases when the unit of income changes. The higher the value of the multiplier, the more the entrepreneur is prone to risk. In the case of a win, the investments can return in a multiple size, and in case of a loss, they can lead to huge losses and even bankruptcy.

Consumption and investment

All incomes of economic entities are distributed into two funds: consumed and accumulated. The accumulated part, in other words, the savings, is the profit that remains inside the firm and is idle for a while. The consumed goes to pay taxes, liabilities, wages to employees and other purposes.

Investing and risk

Investments are consumed and returned to enterprises in the form of equipment and assets, which means that it is important for the entrepreneur that the capitalized part of the profit is as small as possible. On the other hand, if the investment in the period under consideration turned out to be not very successful and did not provide an inflow of money, the enterprise has to resort to external sources of financing. Again, these are banks, financial institutions, formal and informal financial markets. And again the question arises: do not take risks or risk it?

The optimal structure of the distribution of income (profit)

Perhaps one of the questions that can not be answered unequivocally by practice, not by theorists: where is the point of equilibrium for investment and accumulation? Even within the framework of one enterprise, one can not say unequivocally what is better, to accumulate or consume, because the market situation, technologies, socio-legal and political sectors are constantly changing. That tomorrow will bring enormous losses, yesterday was threatened with bankruptcy, and vice versa.

Mathematically, investment functions do not provide a universal solution - they only reflect average trends, discarding a number of minor factors that can suddenly become significant. For the head, they serve as a generalized example, and the final decision on investing is taken after a thorough study of all factors and the real state of affairs in the economy.