Investments are either autonomous or induced. Basically, most investment decisions are regulated by economic considerations, such as the rate of interest and/or the output. However, if an investment does not rely on any of these economic conditions, it is called autonomous investment. Hence, these investments are usually independent of income level.
What Is an Autonomous Investment?
Autonomous investment is any investment by a government or business which is not affected by economic factors such as the rate of interest, rate of profit, as well as level of income. Basically, it happens when a business or government invests in a foreign nation without the scrutiny of its economic growth or considering the possibilities for the investment to yield positive returns. Investments like these help with economic aid, geopolitical stability, national or personal security, improving infrastructure, humanitarian goals, etc
How does it work?
Basically, governments and businesses make autonomous investments because they see them as fundamental needs for the well-being of people and the nation as a whole. These investments are a necessity and the appropriate bodies (government or businesses) still implement them even when disposable income is zero.
Some examples of investments that are autonomous are inventory replenishment and infrastructure projects by governments like highways and roads. Also, other investments that sustain or strengthen a country’s economic ability are autonomous. An increase or decrease in the gross domestic product (GDP) growth of a country does not have any effect on these investments. This indicates that their sole aim is to improve societal welfare and not profit-making.
Autonomous Investment vs. Induced Investment
Autonomous investments are different from induced investments. While economic factors do not affect the former, they greatly affect the latter. Induced investments can increase or decrease depending on the level of economic growth. Also, the goal of induced investment is to yield profit and they are likely to be more variable because they react to shifts in economic output.
For example, as the level of disposable income increases, so does the amount of induced consumption. This policy relates to all regular goods and services. When individuals have high disposable income, they will be in a better position to either save or invest money for future purposes.
Both autonomous and induced investments can be described based on the MPI (marginal propensity to invest). Basically, MPI is the change in investment which experts reflect as an amount of the change in economic development. When that MPI is zero, the investment is autonomous. However, when it is positive, the investment is not autonomous but induced.
Factors Affecting Autonomous Investment
Basically, external factors do not influence investments that are autonomous. However, in reality, various factors can affect this kind of investment. For instance, interest rates have a major impact on any investments governments or businesses make in an economy. Usually, high-interest rates reduce consumption and low-interest rates increase it. In turn, this can affect the rate of spending within a country’s economy.
Also, trade policies between nations can affect the autonomous investment citizens make. If a manufacturer of cheap goods puts duties on exports, it will make finished products more expensive for outside geographies.
Bottom Line
Autonomous investments are simply investments that are independent of economic factors and profit. Usually, governments and businesses make this kind of investment due to the basic necessities of the country and its citizens. However, in the real world factors like trade policies between countries and interest rates have a substantial impact on this kind of investment.
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