Premium Essay

Role of Capital Accumulation

In: Other Topics

Submitted By rebeccabirchx
Words 583
Pages 3
Why do developing economies and many development economists emphasise so much the role of capital accumulation in the development process?
Capital is a factor of production that can be accumulated through investment. It can be split into at least two groups, physical capital and human capital. Physical capital includes the value of all existing machines, equipment, buildings and infrastructures. Human capital involves the value of productive investments embodied in the labour force. High capital per worker is likely to reflect high living standards and I will discuss strengths and weaknesses of this argument, and its role for developing economies using the neo-classical growth model.
Neoclassical Growth Model
The neo-classical growth model attempts to explain long-run economic growth by looking at capital accumulation, labour or population growth, and increases in productivity. We assume savings are based on a constant fraction of total income (Y).
Yt – Ct = St = sYt
Where Y is income in year t, C is consumption, S is the gross aggregate savings, s is the ratio of saving to GDP or the gross savings rate.
There are two relationships between output and capital. Firstly, the level of capital stock determines the amount of output produced; also the amount of output determines the level of saving and in turn, the capital accumulation over time. We assume capital is subject to decreasing returns so when the capital per worker is already high, the impact on output of the last unit of capital accumulated will always be less than the one before. Another assumption, for simplicity, is that there is no technological developments or labour force growth.
In the short run the model predicts the rate of growth of the economy is determined by capital accumulation, which is in turn determined by the savings rate (s) and the rate of deprecation.
Kt+1 = s f (kt ) − (n...

Similar Documents

Free Essay

Workers Economy (Athabasca)

...What is the subject matter of economics? What role does the “division of labor” play in defining this subject matter? The subject matter of economics deals with social science concerned with administration of scarce resources. These resources can be objects and services that are capable of satisfying human needs and wants in both direct and indirect ways. This can be by helping to produce other objects and services whose use satisfies human wants. The administration of resources does not always create economic problems. There are lots of these resources that are more than enough to satisfy all of human wants and needs completely depend of them. One such resource example is “Air”. Such type of resources are known as free resources where it’s not necessary to organize its use because there is no side effects or waste for any inefficient use of such resources. On the other hand, scarce resources are resources that are not sufficient to fulfill human wants and needs completely. Therefore, these types of wants can only be partially satisfied. This reflects the problems of administration which are the subject matter of economics. Firstly, one of the problems of administration is to make sure complete utilization of scarce resources, because incomplete utilization may cause dissatisfaction to human beings. Secondly, in cases where these scarce resources are fully utilized, there is still an ongoing administrative problem of allocating the resources as required by the different......

Words: 7798 - Pages: 32

Premium Essay

Solow Model

...Solow Model The Solow Model states that by looking at productivity, capital accumulation, population growth and technological progress we can explain how long run economic growth can be achieved. The Solow Model also makes a clear distinction that new capital is more valuable than old capital. This is because since capital is produced based on new technology and technology is improved within time, then new capital will be more productive than old capital. One of the most important things any economy would like to achieve is a steady state. A steady state is a situation in which the economy’s output per worker, consumption per worker, and capital stock per worker are constant (Abel & Bernanke & Croushore, 2012, pg. 216). The rate of growth of an economy as it emerges to a steady state is determined by the rate of capital accumulation. Capital accumulation is in turn determined by the saving rate. Of course the higher the saving rate the high the amount of capital accumulation. The higher a countries saving rate the faster it will grow, however this is true only in the short run. In the long run, the Solow Model states that it is technological innovation rather than capital accumulation that sustains the growth. In fact capital accumulation might hinder growth in the long run because of the marginal productivity of labor, which will decrease. Thus saving while desirable in the short run is not in the long run, unless it is accompanied with technological......

Words: 897 - Pages: 4

Premium Essay

Liquidity and Stock Return

...4. ECONOMIC DEVELOPMENT: A CHANGING FOCUS 4.1 Introduction The large impact of TFP growth on economic growth (on average 56.5%) found in the previous section provides a sign that there were also other factors, besides physical capital, which were important for economic growth. However, because TFP growth is calculated as a residual, it is unclear which factors are captured by TFP growth. Whether this was technology, as was often assumed, or whatever other factor, could not be decided based on this evidence. This was less a problem in early development economics when development was looked upon as (lack of) physical capital accumulation (see for example Lewis 1955). As physical capital accumulation was inserted in the growth accounting exercise, the TFP growth could simply be interpreted as technological growth. Yet, with the rising importance of other, social, indicators such as health, literacy, and human capital, the growth of TFP could reflect the growth of these social indicators as well. 4.2 A classic view: GDP and physical capital On the basis of per capita GDP data provided by Maddison (2003), we may conclude that the levels of per capita GDP were about equal in India, Indonesia, and Japan around 1800. However, in the course of the nineteenth century they started to diverge. In 1890 Japan was already clearly ahead, having a gap in per capita GDP of 35% with Indonesia and 65% with India (see figure 1.1). Indeed, figure 1.1 shows that from 1870 onward......

Words: 2232 - Pages: 9

Premium Essay

Human Captial Development

...Development of Human Capital in Organizations [First name of the author appears here] [Name of the course appears here] [Date of submission appears here] Human Capital Development: Issue of Reducing Income Inequality Introduction Human capital is the set of skills, talents, skills, experiences accumulated by an individual which determine their ability to produce for themselves or for others. Human capital theory works by analogy to that of financial or physical capital. It is considered that human capital is composed of three elements that together determine a certain ability of an individual to work: namely, skills, experiences and knowledge. Human capital can be developed through continuing education and attention to the health of an individual. The inclusion of human capital in the economic analysis is an important step. It is generally theorized that accumulation of human capital is a key driver of economic growth. According to economists, dissemination of knowledge to general population allows increasing returns and generates positive externalities. Therefore, it is a central concept of development economics that investment in human capital should be the foremost priority of developing countries. Foreign direct investment refers to international movement of capital across national boundaries. This may take the shape of creation of a subsidiary abroad or to exercise control on the management of a company in another country. The effects of FDI are generally......

Words: 2617 - Pages: 11

Premium Essay

Accumulation of Wealth

...The accumulation of capital is the gathering or amassing of objects of value as judged by one’s perceived reproductive interest group, the increase in wealth through, concentration, or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money (whealth in the form of profit, rent, interest, royalties, capital may also be seen as a form of capital, investment in one’s personal abilities, such as through education, to improve their function and therefore increase their income potential in a market economy. Poverty is the inability of getting choices and opportunities of human dignity. It means lack of basic capacity to participate effectively in society. It means not having enough to feed and cloth a family, not having a school or clinic to go to not earn one’s living, not having acces to credit. It means insecurity powerlessness and exclusion of individuals house holds and communities. A developing country, also called a less developed country (LDC) is a nation with a lower living standard, underdeveloped industrial base and low human development index (HDI), relative to other countries. The development of a country is measured with statistical indexes such as income per capital (per person), (gross domestic product), life expectancy, the rate of literacy (ignoring reading addiction). Developing countries like Tanzania, Kenya, Ethiopia and others are, in general countries that have not achieved a significant degree of......

Words: 1548 - Pages: 7

Premium Essay

What Is the Role of the Reserve Army of Labor Marx? How Would You Gauge Marx's Approach in Relation to the Theories of Effective Demand Developed by Kalecki and Keynes?

...What is the role of the reserve army of labor Marx? How would you gauge Marx's approach in relation to the theories of effective demand developed by Kalecki and Keynes? Throughout economic theory, there are various responses to the creation and subsequent role of unemployment and the wage rate. In Karl Marx’s theory, unemployment, or the ‘reserve army of labour’, is necessary for capitalism to regenerate itself, and is also what determines the wage rate. For John Maynard Keynes and Michael Kalecki, unemployment is caused by the failure of effective demand. This essay will first demonstrate Marx’s approach to employment through the study of the reserve army of labour and the cyclical tendencies of the capitalist system, and then Keynes and Kalecki’s theories of effective demand which led to the proposition that the economy ‘will not settle at full employment equilibrium; by and large it will not even reach it except by chance’ (Halevi, 2007, week 7, p. 8). For Marx, unemployment, or the reserve army of labour, is a ‘necessary requirement for capital accumulation’ (Halevi, 2007, week 4, p. 2), linked to fluctuations in the wage rate and thus the rate of profit. The existence of a large reserve army of labour keeps wages down, because there are many unemployed workers available and willing to work for little money. Like the classical economists, Marx contends that low wages mean capitalists reduce their costs of production, resulting in a higher rate of profit......

Words: 1723 - Pages: 7

Premium Essay

Chang Adn Lin Debate

...conform符合 to current comparative advantage * State taking a lead role in development * Developing countries are ridden with market failures * Arthur Lewis (1955) – ‘No country has made economic progress without positive stimulus from intelligent governments’ * “Facilitating state” - state that facilitates the private sector’s ability to exploit the country’s areas of comparative advantage * Optimal industrial structure is endogenous to the country’s own endowment structure * Effective facilitating state creates larger surplus/profits * Faster growth from ‘off the shelf’ technology * encourages firms to adopt technologies which are consistent with the country’s comparative advantage * government adopts a set of required policies/institutions to encourage firms to adopt technology which is consistent with the country’s comparative advantage and makes them profitable in an open, free and competitive market. * Lower learning costs (when industrial policy conform to comparative advantage) * Slow capital accumulation & industrial upgrading process (when industrial policy defy comparative advantage) Main Arguments – Chang, H * Welcomes the importance of industrial upgrading with comparative advantage as a baseline * Assumptions of Heckscher-Ohlin-Samuelson theory (HOS) are unrealistic * E.g. factor immobility, same technology available * Factor accumulation over time can be restricted to certain industries ......

Words: 441 - Pages: 2

Premium Essay

Classical Theory of Growth and Stagnation

...jurisprudence and political economy.[3] [edit]Introduction Adam Smith has not received as much recognition for his theory of growth as he has for his theory of value and rent, but the fact still remains that he does provide a consistent dynamic model. Adam Smith identified three major sources of growth: (i) growth in the labour force and stock of capital (ii) improvement in the efficiency with which capital is used in labour through greater division of labour and technological progress (iii) promotion of foreign trade that widens the market and reinforces the other two sources of growth.[citation needed] To understand the final growth process as stated by Adam Smith in this theory, we first need to look into the individual components, which have laid the foundation of the theory. These are Adam Smith's Production Function, his views on the process of growth of labour force and capital accumulation in the economy. [edit]The production function Adam Smith recognized only three factors of production: land, labour and capital. Considering these three factors, his production function may be expressed as Y=ʄ(K,L,N) where, K represents the capital L denotes labour force N stands for land Adam Smith, in his theory, has not assumed his production function to have Diminishing marginal productivity. However, his production function is subject to increasing returns to scale (which means that, output increases...

Words: 1835 - Pages: 8

Premium Essay

Financial Crisis

...O C C A S I O N A L PA P E R S E R I E S N O 1 2 3 / F E B R UA RY 2 011 THE INTERNATIONAL MONETARY SYSTEM AFTER THE FINANCIAL CRISIS by Ettore Dorrucci and Julie McKay OCCASIONAL PAPER SERIES NO 123 / FEBRUARY 2011 THE INTERNATIONAL MONETARY SYSTEM AFTER THE FINANCIAL CRISIS by Ettore Dorrucci and Julie McKay1 NOTE: This Occasional Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. In 2011 all ECB publications feature a motif taken from the €100 banknote. This paper can be downloaded without charge from or from the Social Science Research Network electronic library at 1 European Central Bank,, The views expressed in this paper do not necessarily reflect those of the European Central Bank. The authors would like to thank, outside their institution, A. Afota, C. Borio, M. Committeri, B. Eichengreen, A. Erce, A. Gastaud, P. L'Hotelleire-Fallois Armas, P. Moreno, P. Sedlacek, Z. Szalai, I. Visco and J-P. Yanitch, and, within their institution, R. Beck, T. Bracke, A. Chudik, A. Mehl, E. Mileva, F. Moss, G. Pineau, F. Ramon-Ballester, L. Stracca, R. Straub, and C. Thimann for their very helpful comments and/or inputs. © European Central Bank, 2011 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany...

Words: 33129 - Pages: 133

Premium Essay

Significance of Foreign Exchange

...Index * Introduction * Definition * Purpose * Benefits and costs of reserve accumulation * Theories of reserve accumulation * History of Foreign Exchange Reserves * Adequacy and Excess reserves * List of countries by Foreign Exchange Reserves * New Realities of Forex Reserves and Management * Conclusion * Reference SIGNIFICANCE OF FOREIGN EXCHANGE RESERVES Introduction Foreign-exchange reserves (also called forex reserves or FX reserves) are assets held by central banks and monetary authorities, usually in different reserve currencies, mostly the United States dollar, and to a lesser extent the euro, the United Kingdom pound sterling, and the Japanese yen, and used to back its liabilities, e.g., the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions. Deposits of a foreign currency held by a central bank. Holding the currencies of other countries as assets allow governments to keep their currencies stable and reduce the effect of economic shocks. The use of foreign exchange reserves became popular after the decline of the gold standard. Definition In a strict sense, foreign-exchange reserves should only include foreign currency deposits and bonds. However, the term in popular usage commonly also adds gold reserves, special drawing rights (SDRs), and International Monetary Fund (IMF) reserve positions. This broader figure is more readily......

Words: 7085 - Pages: 29

Premium Essay


...employing available information and factors of production. This economic model was developed from the classical school of economics, which was dominant in the eighteenth and nineteenth centuries. It can be traced to the marginal revolution of the 1860’s, which came up with the concept of utility as a key factor in deterging value in contrast to the classical views that the costs involved in production were value’s determinant. The Neo classical approach became increasing mathematical, focusing on the perfect competition and equilibrium. Neo classical growth model considered two factors production function with capital and labour as determinants of output. Besides, it added exogenously determined factor, technology, to the production function. Neo classical growth model uses this production function: Y=AF (K, L)……….(1) Y= Gross Domestic Production (GDP) K= Stock of Capital L= Amount of unskilled labour A= Exogenously determined level of technology. *Note a change in this exogenously variable and technology, will cause a shift in production function. There are two ways in which technology parameter A is incorporated in the production function. The popular way of incorporating the technology parameter in the production function is to assume that technology is labour augmenting and accordingly the production function is written as; Y=F (K, AL)…………(2) *Note that labour- augmenting...

Words: 2574 - Pages: 11

Premium Essay

Ipe in Trade & Finance

...E C O N O M I C I S S U E S 1 Growth in East Asia What We Can and What We Cannot Infer Michael Sarel I N T E R N A T I O N A L M O N E T A R Y F U N D E C O N O M I C I S S U E S 1 Growth in East Asia What We Can and What We Cannot Infer Michael Sarel I N T E R N AT I O N A L M O N E TA RY F U N D WASHINGTON, D.C. ©1996 International Monetary Fund ISBN: 1-55775-607-4 Published September 1996 Reprinted November 1996 To order IMF publications, please contact: International Monetary Fund, Publication Services 700 19th Street, N.W., Washington, D.C. 20431, U.S.A. Tel.: (202) 623-7430 Telefax: (202) 623-7201 Internet: Preface The Economic Issues series was inaugurated in September 1996. Its aim is to make accessible to a broad readership of nonspecialists some of the economic research being produced in the International Monetary Fund on topical issues. The raw material of the series is drawn mainly from IMF Working Papers, technical papers produced by Fund staff members and visiting scholars, as well as from policy-related research papers. This material is refined for the general readership by editing and partial redrafting. The following paper draws on material originally contained in IMF Working Paper 95/98, “Growth in East Asia: What We Can and What We Cannot Infer From It,” by Michael Sarel, an Economist in the Fund’s Southeast Asia and Pacific Department. It has been prepared by David D. Driscoll......

Words: 7223 - Pages: 29

Premium Essay


...relatively long periods of time. Related to this second observation is another: in cross-section and timeseries data, we find national and regional growth rates correlated with a variety of economic, social, and political variables, including many that are affected by government policies. These observations have led the current generation of growth theorists to formulate models in which per capita income grows indefinitely and long-run performance reflects structural and policy parameters of the local and global economy. With this apparent similarity of intentions, recent research efforts have headed in several different directions. One strand of theory continues to see capital accumulation-though conceivably with a broad interpretation of that includes human capital-as the driving force behind economic "capital" * Gene M. Grossman is the Jacob R. Viner Professor of International Economics, Princeton University,Princeton, New Jersey. Elhanan Helpman is the Archie Sherman Professor of International Economic Relations, Tel Aviv University, Tel...

Words: 10469 - Pages: 42

Premium Essay

Economic Structural Changes and Growth

...countries which mainly relies on technological innovation. However, as for developing countries, growth and development follows developed countries by forcing the technology mechanism and changing the structure of production towards activities with higher levels of productivity. The evidence show that during 1970s and 1980s there were of structural changes in economic activities where developing countries enters the global markets. In his preface, Giplin (2001; xi) point out that “…important step toward the creation of a truly global economy, since the mid-1980s the world has also witnessed the extraordinary growth of economic regionalism as a countermovement to economic globalization.” Similarly, Magdoff (1992; 50) state that “In fact, capital exports have helped shape the evolving global economy ever since the end of the Second World War”. Moreover, Glyn and Sutcliffe (1992; 79) point out that “…left the world economy leaderless in the 1970s and 1980s with increasingly open economies disciplined by market forces, but without a unique center of gravity.” This implies that global economies forces t To provide a well-structured discussion, this essay will begin by briefly introducing into how neo-liberalism in the mainstream of development thinking greatly achieve its victory of defence mechanism for a new wave of market orientation intervention, before discussing the structural changes. It will then provide explanation on how these structural changes resulted to......

Words: 3839 - Pages: 16

Premium Essay

Questionnaire 2

...definition of development? 5.Why do we use “purchasing power parity” measures when comparing incomes across countries? 6.Suppose that you had to explain this graph to someone who is not a “visual learner” – he just doesn’t get pictures. You have to explain every feature of the graph using words. 7.What are the components of the Human Development Index? What are some strengths and weaknesses of the HDI as a comparative measure of human welfare? 8.Discuss the Millennium Development Goals. How can the mere act of adopting these goals as aims of action be beneficial for economic development? Chapter 3 9.What does it mean to say that “factor accumulation” and “productivity growth” are important for development? How are they distinct? 10.Most growth models assume that new investment increases the capital stock, that investment is financed by saving, and that saving comes...

Words: 1841 - Pages: 8