Marginal Propensity To Invest

AAA

DEFINITION of 'Marginal Propensity To Invest'

The ratio of change in investment to change in income. The marginal propensity to invest shows how much one additional unit of income will be used for investment purposes. Typically, investment increases when income increases, and decreases when income decreases. The greater the marginal propensity to invest, the more likely it is that additional income is not consumed, but instead invested.

INVESTOPEDIA EXPLAINS 'Marginal Propensity To Invest'

In Keynesian economics, a general principle states that whatever is not consumed is saved. Increases (or decreases) in income levels induce individuals and businesses to do something with the extra cash. Consumption tends to be impacted more by increases in income, as demonstrated by increased consumption levels when countries develop.

The marginal propensity to save, while typically smaller than the marginal propensity to consume, does have an impact on the multiplier effect and does affect the slope of the aggregate expenditures function. The larger the marginal propensity to invest, the larger the multiplier. For a business, increases in income can be the result of reduced taxes, changes in costs or changes in revenue.

Marginal propensity to invest is calculated as ΔI=/ΔY, meaning the change in value of the investment function (Im) with respect to the change in value of the income function (Y). It is thus the slope of the investment line. For example, if a $5 increase in income results in a $2 increase in investment, the marginal propensity to invest is 0.4 ($2/$5).

RELATED TERMS
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  2. Macroeconomics

    The field of economics that studies the behavior of the aggregate ...
  3. Factor Market

    A marketplace for the services of a factor of production.
  4. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
  5. Freelance Economy

    A freelance economy revolves around hiring self-employed workers ...
  6. Peer-to-Peer (P2P) Economy

    A Peer-to-Peer, or P2P, Economy is a decentralized model whereby ...
RELATED FAQS
  1. What is the Keynesian multiplier?

    The Keynesian multiplier was introduced by Richard Kahn in the 1930s. It showed that any government spending brought about ... Read Full Answer >>
  2. What are some causes of structural unemployment?

    Structural unemployment is a form of unemployment caused by shifts in the economy. It occurs when there is an oversupply ... Read Full Answer >>
  3. How does an economic downturn affect a cyclical stock?

    An economic downturn negatively affects a cyclical stock. Its stock price declines as earnings and revenues tumble. Cyclical ... Read Full Answer >>
  4. What is the difference between frictional unemployment and structural unemployment?

    Structural unemployment and frictional unemployment are two different types of unemployment that occur in an economy. Frictional ... Read Full Answer >>
  5. What are some common features of a mixed economic system?

    A mixed economy is defined by the co-existence of a public and private sector. The specific mix between public and private ... Read Full Answer >>
  6. How does the Affordable Care Act affect moral hazard in the health insurance industry?

    To see how the Patient Protection and Affordable Care Act, or "Obamacare," affects moral hazard in the health insurance industry, ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about a British economist's proposed solution to a common economic problem.
  2. Economics

    What is Productivity?

    Productivity is an economic term describing the relationship between outputs as compared to inputs needed to produce those outputs.
  3. Economics

    The 5 Industries Driving the U.S Economy

    Jobs are being created by the millions, wage growth is picking up and foreign trade is only 30% of the nation’s GDP.
  4. Economics

    How the UK Makes Money

    The United Kingdom has one of the strongest economies in the world thanks to the strength of its services, manufacturing and tourism sectors.
  5. Economics

    Will The US Economy Rebound In The 2nd Quarter?

    Most investors know that U.S. 1st quarter growth numbers aren’t pretty. Economic statistics have been missing expectations by the largest margin since 2009
  6. Economics

    What Part of the Money Supply is M2?

    M2 is the part of the money supply economists use to analyze and predict inflation.
  7. Economics

    The U.S. Economy May Be Stronger Than You Think

    While the economic performance in the U.S. broadly disappointed in the first quarter, temporary factors presented one-off events that depressed output.
  8. Economics

    Understanding Marginal Benefit

    Marginal benefit is an economic term that describes the maximum amount a consumer is willing to pay for an additional unit of a good or service.
  9. Fundamental Analysis

    Understanding the Simple Random Sample

    A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen.
  10. Economics

    What is Systematic Sampling?

    Systematic sampling is similar to random sampling, but it uses a pattern for the selection of the sample.

You May Also Like

Hot Definitions
  1. Standard Error

    The standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the ...
  2. Capital Stock

    The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents ...
  3. Unearned Revenue

    When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can ...
  4. Trailing Twelve Months - TTM

    The timeframe of the past 12 months used for reporting financial figures. A company's trailing 12 months is a representation ...
  5. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known ...
  6. International Financial Reporting Standards - IFRS

    A set of international accounting standards stating how particular types of transactions and other events should be reported ...
Trading Center