What is an Investment Function?

An investment function is a concept or strategy within economics that helps to identify the connection between shifts in the national income and the investment patterns that take place within that particular national economy. In this type of situation, a function would be any variable within the framework of the economy that would motivate investors to change their typical buying and selling habits as a means of either taking advantage of the economic shift in a bid to increase their returns or to minimize the amount of loss incurred as a result of that shift. In weighing variables, the investor will consider the current level of gross domestic product (GDP) as well as the average interest rates that currently apply within the economy.

The idea behind an investment function is to explain how some shift in national income in turn triggers changes in how investors trade on the various markets within that country. In order to accomplish this, it is important to directly relate changes in the marketplace to events occurring within the economy in general. For example, if consumers were to suddenly abandon goods produced by one industry in favor of those produced by another, this would trigger significant changes in how investments were traded. Investors would attempt to sell stock related to the former industry quickly before the unit value of each share began to drop. At the same time, investors who had given little attention to the latter industry would begin to purchase shares related to that industry before the economic shift caused the price of those shares to begin increasing rapidly.

Understanding this concept is also important to businesses that operate within different industries. By taking into account factors that are likely to alter the course of the national income, such as technological changes that create some shift in the gross domestic product, it is possible for corporations to position themselves to make the most of those pending shifts. At times, this means shifting production of different products upward or downward in order to accommodate the upcoming change. When this is accomplished successfully, the stock issued by the company is more likely to hold value and not lead to a significant drop in the stock price.

Economists also consider it as a means of assessing the long-term results of how severe a shift in the national income will affect activity in the marketplace. Doing so makes it easier to project when the response to national income shifts may create economic circumstances that serve to worsen the economy and possibly drive the country into a period of recession. By accurately predicting the investment function, economists may also be able to find ways to minimize the level of impact, or identify a means of shortening the period of recession, allowing both the national economy and the marketplace to recover sooner rather than later, thanks to policies implemented by the national government.