“Capital deepening affects the level of output but not the growth rate in the long run.”
This is given under neoclassical model on page number 318 in the schwaser notes can anybody please explain this statement
If growth rate is affected then it seems to me that level of output has to be affected unless they are talking about short term fluctuations in the output level.
If capital is applied to the production function, it will increase output in the short run but can’t maintain this new level unless technology advances along with it
Think about it like this, if you bought 500 new machines to produce 900k more pencils per day, you’re increasing the supply of this product which reduces its price, all else held constant, that is not good for your business(you’ll likely fail and your production is effectively elimianted). However, if your new 500 machines produce 900k pencils at a lower cost, then you’ll be able to maintain this new output level.
Thank you dude!! Much appreciated
Remember that the goal of an economy under neoclassical theory is to maintain MPK = r, the cost of capital. Capital deepening without technological improvement leads to MPK < r (because of diminishing marginal returns to capital); thus, without technological advancement, capital per worker will have to return to the original level.
This article I wrote may be of some help: http://financialexamhelp123.com/neoclassical-growth-theory/.
Very pretty article mate!! made it all clear… thank you … if you dont mind post all the links for various topics that you think might be relevant and useful… thank you in advance
Thanks, guys! I appreciate the enthusiastic responses.