Economic Growth: Problems 2

Problem :

What is the capital stock and how is it increased?

The capital stock is the total amount of capital, both human and physical, in an economy or firm. It is increased by spending money on capital items.

Problem :

What is the single most important factor in determining the annual increase in the capital stock?

The single most important factor in determining the annual increase in the capital stock is the savings rate in an economy.

Problem :

What is the effect of an increase in the capital stock?

An increase in the capital stock results in an increase in output for a given amount of labor.

Problem :

How does technological progress come about?

Technological progress generally comes about through spending on research and development.

Problem :

What is more important for increasing productivity, increased capital expenditures or increased technological progress?

Neither is superior. Instead, each is required for sustained economic growth. Because technological progress is unpredictable, that is, it is present and very important at times and not at others, capital expenditures are able to increase productivity with current capital. When technological progress is ready to provide new capital for production, then the importance shifts. In this way, the forces of capital expenditures and technological progress work hand in hand to increase productivity.

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