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02:28:14 Macro Notes.doc

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ECON 1901
Nathan Blascak

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02/26/14 and 02/28/14 Chapter 8: Assumptions Investment Depreciation -the percentage of a country’s capital stock that depreciates= delta *higher levels of capital stock --> more depreciation • so every year we invest some GDP -some capital is needed to replace old capital -some goes to help the economy grow in size • For the capital stock to grow: -investment > depreciation increase in capital is greater than the wearing out of capital -investment < depreciation capital wears out faster than it is replaced -economy is shrinking investment =depreciation -you add just enough capital to replace the old capital -implies no economic growth --> “steady state” Investment recall: our assumption of diminishing product of capital -at low levels of K, adding an additional unit is very productive -that at high levels of K, adding an additional unit is not very productive • Low levels of K -the marginal product of capital is high -there is an incentive to invest -depreciation is low • At high levels of K -the marginal product of capital is low - “too much capital”
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