Question

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

Answer 1

Investment to GDP & Growth

The growth of economy, which is always a matter of concern for economists, the idea of necessary conditions to attain certain level of growth stimulate the path of economic growth. A ratio of investment to GDP is an important condition for increasing the efficiency and growth of economy. It is investment which could help in creating a cycle that finally leads to increase in output and several factors that lead to economic growth. A self sustaining growth demands for the necessary impact of investment in the economy.

An investment to GDP ratio which is added to the current fixed capital could increase the demand of commodities by increasing labor productivity, reducing prices of commodities and thus increasing the total supply of commodity. An encouragement to investment will increase the productivity of labor and wages which increases the demand added by the increased wages of labor. This increase in demand could be met by increased supply of output. So, an addition to the existing fixed capital through investment can create a form of circle which could increase demand by further ways and thus increasing the supply of output. Along with increased labor productivity, the reduction in price due to the addition in investment reducing the cost of production will increase the demand for the commodity. This increase in output due to increase in supply is actually the driving factor of increasing wages for labor. These all factors by change in investment which leading to change in demand and thus supply leading stimulating the self sustaining growth of economy. The change in output due to change in demand will increase the GDP of the country which gradually leads to the growth of economy as a cycle.