Question

Why have economists identified a certain ratio of investment to GDP as a necessary condition for self-sustaining growth?

Answer 1

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