ECO 1102 Lecture Notes - Lecture 8: Diminishing Returns, Capital Formation, Price Level

• School: University of Ottawa
• Department: Economics
• Course: ECO 1102
• Professor: David Gray

Document Summary

Public policy means what can or should the government do or not do in order to achieve economic growth. Money that is kept and not spent. We are going to give up present consumption through saving in order to produce more capital goods through investment spending, which augments the capital stock. Savings finance investment spending (spending on physical capital): countries that allocated most gdp to investment spending tend to grow the fastest. Capital, similar to labour, is thought to exhibit diminishing returns. Capital formation leads to higher real gdp but additional increments of capital yield declining yet still positive increments to real gdp. Diminishing returns are said to be positive, and they can also be zero, but we do assume that diminishing returns cannot be negative. Increase in capital become smaller and smaller over time and reaches a plateau. The implication of diminishing returns is that the economy will not grow as fast as it once did.