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How is Investment and National Income linked?
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We know that

Investment is an Expenditure

This expenditure of one person is income of other person and the process continues

hence, Investment and Income are linked

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Example 1
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Suppose there are only 2 persons in economy- F (Firm) and Household (H)

Suppose Firm Increases its Investment Expenditure by 10000

It will do so by paying salary /rent etc to H of Rs 10000

This 10000 will become Income of H

Hence, Increase in Investment of F lead to increase in Income of Household

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Example 2
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A incurred Investment Expenditure of Rs 10000 by paying wages to B

This Rs 10000 is now income of B

Suppose Marginal Propensity to consume is 80%

It means B will spend 8000 out of this 10000 by paying to C

Hence, this 80000 becomes income of C

Suppose C spends 6400 out of this 8000 by paying to D

Hence, this 6400 becomes income of D and this process continues as under

In this case,

Investment Made by A =10000

Income earned by B,C,D etc=10000+8000+6400+..=50000

Hence, Increase in Investment leads to Increase in National Income by many times

This concept is called Investment Multiplier

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What is Investment Multiplier?
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It is the ratio of Increase in National Income(Y) due to Increase in Investment (I)

It is denoted by k

Investment Multiplier=Increase In Income / Increase in Investment

K = Delta Y / Delta I

Example 1

Suppose on investment of 50000 ,Income earned is 10000

If investment increased to 60000,Income becomes 30000

In this case

Increase in Income =30000-10000=20000

Delta Y=20000

Increase in Investment =60000-50000=10000

Delta I=10000

Investment Multiplier=Increase In Income / Increase in Investment

K = Delta Y / Delta I

K = 20000 / 10000

K = 2

Example 2

An additional Investment of 20000 Crore in economy generate additional income of 30000 Cr

What is Value of Investment Multiplier?

Investment Multiplier=Increase In Income / Increase in Investment

K = Delta Y / Delta I

K = 30000 / 20000

K = 1.5

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