Question
In: Economics
Why have economists identified a certain ratio of investment to GDP as a necessary condition for...
Why have economists identified a certain ratio of investment to GDP as a necessary condition for self-sustaining growth?
Solutions
Expert Solution
Investments are an important component in aggregate demand. Long
run economic growth and development were based on the level of
current investment rate. The expected long run growth of the real
income is one of the key determinant of average real interest rate
in the economy. Investment rate was mainly influenced by the rate
of interest in the economy. An efficient investor will identify and
forecast the factors which drive long term economic growth. Based
on the evaluation of long term economic development, the investor’s
will decide the investment level and the risk of investing in
particular securities.
Every economy focus to maintain the equality between potential GDP
and actual GDP. The growth rate of potential GDP determines the
long run economic growth. The increase in potential GDP will
increase the total level of income in the economy. Being a part of
development of global portfolio equity, the investors will fix the
fixed income strategy which helps the sustainability of growth.
Economy’s productive capacity was determine by the level of
investment. Consumption expenditure, investment expenditure and
government expenditure are the major components of real GDP. The
growth rate of real GDP and level of per capita income will differ
the investment opportunities in different countries. One of the
critical variable used here is the rate of inflation. The rate of
investment change with respect to the inflation rate also. The
capital deepening or the net investment will exceed the growth rate
of labour. Increasing level of total fixed productivity will leads
to proportional increase in the investment and overall
production
Rahul Sunny answered 9 months agoRelated Solutions
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