Capital deepening is defined as “an economy where capital per worker is increasing. ” As capital per worker increases, it is assumed that the economy will expand as the worker yield will be increasing. But at full employment-which is the level of national income where there is no deficiency of demand-things will work a bit differently.
This economic expansion cannot continue through capital deepening alone when economy is at full employment and all other factors of production that is capital, land and entrepreneurship investment needs to grow at the same rate for economic expansion to take place if economy is operating on full employment level. Thus workers may be affected negatively by capital deepening if economy already operating at full employment because the demand for more output is simply not there. 2.
List the sources of output growth and describe how growth accounting explains where growth comes from. Sources of output growth include: i) an increase in the quantity of factors of production that is land, labor, capital and entrepreneurship, ii) an increase in the productivity of factors of production, iii) an increase in consumption levels iv) increasing trade between nations. Growth accounting are sets of economic techniques and theories which determine where growth comes from. It states that changes in output result form changes in input.
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The most basic model in this theory is: Output/Income (GDP) = technology x F [capital, labor] To determine the level of the components involved in the equation, the level of employment (labor), capital available and the technology can be found through national statistics or polls taken by the government. 3. Explain how the interest rate effect can increase aggregate demand. The interest rate effect is an important component of the monetary policy. Especially nowadays, it is a major tool for governments in fighting off the recession. It impacts demand in a huge way.
What happens is that if interest rates fall, people have less of an incentive to save because the banks are not offering that much a savings rate. So the people either invest or spend the money. When money is spent, aggregate expenditure in an economy increases which in turn helps increase national income. When people invest in projects, this also spurts growth in the economy and demand consequently increases. The opposite holds true if interest rates are raised. Rising of the rates curbs spending in an economy because people now find the saving money option offering them greater returns then investing elsewhere.
Aggregate demand and aggregate expenditure both fall and this reduces the national income of the economy of a country. 4. Explain why the long run aggregate supply curve is vertical. The long run aggregate supply curve depends on the interdependence of firms, investment and expectations of the general population (Rao , 2002). It illustrates the output that firms in an economy are willing and able to supply in the long run. It is depicted as a vertical line because economists believe that in the long run, an economy will operate at full capacity.
Its shifting depends on the technology available in a country, an increase in the investment in a country caused either by a change in government or foreign aid or ventures, improvements in training of the workers, immigration of labor to or from a country and discovery of more natural resources in a country. The price level, then, does not affect the curve anymore due to these factors and the supply of an economy remains the same in the long run at all price levels. But this curve can shift outwards or inwards depending on the change in the factors mentioned above.
Rao, B. B. (2003). Aggregate Demand and Aggregate Supply. USA: TK
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