Investment which is influenced by the level of national income (GDP) and which changes along with the changes in the level of GDP is called induced investment. At higher levels of national income (GDP) there is larger volume of induced investment. This is because an increase in national income results in a greater demand for goods and services and consequently, there is a larger investment in fixed capital assets and inventories so as to produce a higher level of output to meet this higher demand.
Similarly, at low levels of national income, total demand for goods and services is smaller and thus only a smaller amount of investment is needed to meet the market requirements. Hence, induced investment or the investment which is motivated by the changes in the level of national income will be smaller at lower levels of GDP and larger at higher levels of GDP.
As is shown, the Investment curve showing the induced investment is rising towards right, indicating smaller amounts of investment at lower levels of GDP and a higher investment at higher at higher levels of GDP.
