Private Investment Demand

Investment is that part of the economy’s expenditure which is used to create new plant and equipment, new durable capital goods that increase the productive capacity of the economy. Private investment refers to the outlay made by the private businessmen which produces durable capital goods that increase the economy’s capacity to produce. It is based on the consideration of profit. If profit prospects are low, then private investment will fall leading to a fall in aggregate demand and the consequent decline in aggregate output and employment.

However, modern economists consider government expenditure and rest of the world demand to be the important components of aggregate demand. Let us discuss these two important components.