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According to this formula the incremental capital output ratio can be computed by dividing the investment share in GDP by the rate of growth of GDP. As an example, if the level of investment (as a share of GDP) in a developing country had been (approximately) 20% over a particular period, and if the growth rate of GDP had been (approximately) 5 ...
Output per worker grows at a roughly constant rate that does not diminish over time. Capital per worker grows over time. The capital/output ratio is roughly constant. (1+2) The rate of return on capital is constant. The share of capital and labor in net income is nearly constant. The wage grows over time. (2+4+5)
Where the capital-output ratio will depend upon the relationship of the growth of capital and the growth of productivity. Wages and profits constitute the income , where wages comprise salaries and earnings of manual labor, and profits comprise incomes of entrepreneurs as well as property owners.
the capital-output ratio is constant (i.e. a fixed amount of output can always be turned into the same amount of capital); real wages change according to a linearized Phillips curve, where wages rise when close to full employment. The model uses the variables q is output k is (homogeneous) capital w is the wage rate a is labour productivity
This model assumes that the stock of capital goods (K) is proportional to the level of production (Y): K = k×Y. This implies that if k (the capital-output ratio) is constant, an increase in Y requires an increase in K. That is, net investment, I n equals: I n = k×ΔY. Suppose that k = 2 (usually, k is assumed to be in (0,1)).
Let k be the capital/labour ratio (i.e., capital per capita), y be the resulting per capita output (= ()), and s be the savings rate. The steady state is defined as a situation in which per capita output is unchanging, which implies that k be constant. This requires that the amount of saved output be exactly what is needed to (1) equip any ...
If the capital-output ratio or capital coefficient (=) is constant, the rate of growth of is equal to the rate of growth of . This is determined by s {\displaystyle s} (the ratio of net fixed investment or saving to Y {\displaystyle Y} ) and k {\displaystyle k} .
It is only profitable for a firm to keep adding capital when the marginal revenue product of capital, MRP K (the change in total revenue, when there is a unit change of capital input, ∆TR/∆K) is higher than the marginal cost of capital, MC K (marginal cost of obtaining and utilizing a machine, for example).