CAPITAL AND ECONOMIC GROWTH To see why capital accumulation via net investment induces economic growth, recall first that the long-run aggregate production function indicates that the amount of real output produced depends on capital as well as labor. To this point, we have graphed the production function with output (y) and (N) on the axes, but we can also draw a diagram of the production function in which we relate output to the amount of capital (K), as in Figure 5-6. Holding employment of labor unchanged, an increase in the amount of capital causes real output to increase.
It follows that greater capital accumulation leads to higher economic growth. Capital accumulation, in turn , requires people and businesses to undertake net investment. Therefore, to understand the factors that can influence capital formation and its contribution to economic growth, we must consider the determinants of net investment.
INVESTMENT AND THE MARGINAL PRODUCT OF CAPITAL Recall from Chapter 4 that desired investment is a component of the demand for loadable funds. According to the classical theory, the desired investment schedule is downward sloping in a diagram in which the real interest rate appears on the vertical axis. Equilibrium investment then is determined by the interplay between saving by households, investment spending that is done mainly by firms, and the demand for loadable funds by the government to finance its deficit.
CAPITAL AND ECONOMIC GROWTH To see why capital accumulation via net investment induces economic growth, recall first that the long-run aggregate production function indicates that the amount of real output produced depends on capital as well as labor. To this point, we have graphed the production function with output (y) and (N) on the axes, but we can also draw a diagram of the production function in which we relate output to the amount of capital (K), as in Figure 5-6. Holding employment of labor unchanged, an increase in the amount of capital causes real output to increase.It follows that greater capital accumulation leads to higher economic growth. Capital accumulation, in turn , requires people and businesses to undertake net investment. Therefore, to understand the factors that can influence capital formation and its contribution to economic growth, we must consider the determinants of net investment.INVESTMENT AND THE MARGINAL PRODUCT OF CAPITAL Recall from Chapter 4 that desired investment is a component of the demand for loadable funds. According to the classical theory, the desired investment schedule is downward sloping in a diagram in which the real interest rate appears on the vertical axis. Equilibrium investment then is determined by the interplay between saving by households, investment spending that is done mainly by firms, and the demand for loadable funds by the government to finance its deficit.
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