The investment multiplier

Effects upon industries of an increase in investment

We have hitherto proceeded with our analysis under the assumption that the amount of investment I2 is given. In taking account of the future of business each firm will decide whether it should make an investment and, if so, on what scale it should be made. If prospects in the future were to improve and the firm invested more, such an increase in investment would influence production. In order to single out the effects of investment we assume in the following that investment alone changes, regarding all other exogenous variables such as exports E1E2 and government demand G1G2 as being kept constant.

Analysis of such effects can be made by referring to Table 6. As we stated earlier, it holds for any column that the sum of all the elements entered in that column is zero, while the sum of the elements entered in one row (such as rows 1, 2, 9, 10, 11, 12) is zero, only if the sector corresponding to that row is in a state of equilibrium, whilst the sum of the elements is identically zero for the other rows. Therefore, if investment increases by ΔI2, we find from the zero-sum condition for row 2 that the output of capital goods must increase by the same amount. Thus we obtain

p2ΔX2 = p2ΔI2 (1)

This expansion of the capital goods industry will bring about a proportional increase in its wages and profits (see Table 6, column 2).