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Econ requirements for increased growth

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ECN 104
Halis Yildiz

Requirements for increased growthCapital expenditurewe learned that increasing capital both human and physical is the only way to create productivity growth in the long run One way to directly increase the amount of capital in an economy also called the capital stock is by increasing the spending on capitalIn order to understand how increasing the spending on capital works it is necessary to understand how money is spent on capital In order for most firms to increase their capital stock they must purchase additional machinery tools and education for their employees Because firms do not often have the large sums of cash necessary for these types of purchases readily available they must go to banks to get funding for their capital expenditures Remember that when banks make loans they are simply matching up savers and borrowers Thus the amount of savings by individuals directly affects the amount of money available for capital expenditures by firms In this way the savings rate in a country is the single most important determinant of the expenditures made by firms on capitalHow much money should be saved in an economy and how much should be invested in capital This question is difficult to answer Some countries like Japan have very high savings rates Others like the US have very low savings rates In both cases the exact effect on the growth of productivity is unclear In general the savings rate that corresponds to the golden rule level of capital is considered optimal This is defined as the savings rate that maintains the level of capital associated with the higher per worker consumption rate In general a savings rate that is as high as possible without significantly reducing the standard of living of the population is desirableRegardless of the savings rate expenditures on capital directly affect the growth rate of an economy They inject the economy with new tools machinery and training These forms of capital are basic necessities of production
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