Induced investment refers to the part of a company’s spending on equipment, buildings, and machinery that changes based on the level of national income or total output. Simply put, when people earn more and buy more products, businesses invest more to increase their production capacity.

Formula: Induced investment = v × ΔY, where v is the accelerator coefficient (the ratio of capital needed to produce an output).

Key features:

• Accelerator effect: When national income grows, firms expect higher sales and invest in more capacity to meet that demand.
• Sensitivity: The accelerator coefficient determines exactly how much investment increases when income changes.
• Business cycle: It makes economic cycles stronger. When the economy grows, investment pushes it higher; when the economy slows, investment drops, which can deepen a recession.
• Disinvestment: If income drops significantly, businesses may stop replacing worn-out equipment, leading to negative investment.
• Economic Multiplier: Induced investment makes the economic multiplier effect larger, as it creates an extra boost to the economy alongside rising consumer spending.