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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 ...
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
For example, if α = 0.45, a 1% increase in capital usage would lead to approximately a .45% increase in output. Sometimes the term has a more restricted meaning, requiring that the function display constant returns to scale , meaning that increasing capital K and labor L by a factor k also increases output Y by the same factor, that is, Y ( k ...
If, for example, this ratio is greater than 1, machinery can be bought at one price and then generate output worth the larger amount that is reflected in its market value, giving positive economic profit. In some research, investment is modeled as an increasing function of the gap between the optimal capital stock and the current capital stock ...
In this stage, the employment of additional variable inputs increases the output per unit of fixed input but decreases the output per unit of the variable input. The optimum input/output combination for the price-taking firm will be in stage 2, although a firm facing a downward-sloped demand curve might find it most profitable to operate in ...
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} .
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)).
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.
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