Question

Explain the role of an increase in physical capital in economic growth

Answer 1

Physical capital plays an important role in the economic growth of a country. Physical capital is one of the three primary factors of production. Physical capital helps to convert raw materials into finished goods and services. These are the tangible assets created by humans and are used in production. For example, assets like plant and machinery, building, etc. Solow's growth model helps us to understand the importance of physical capital in economic growth. This model makes measuring growth quantifiable. With the help of this model individuals can measure the impact of a changing labor force and changes in physical capital on GDP. In this model a country can grow through factor accumulation, increasing physical capital or by expanding its labor force, the latter however only increases aggregate output levels while decreasing per capita output. The model shows that when a labor force is increased with no capital growth it only shrinks the output per worker which depends on capital per worker. This is so because if you have more workers with the same amount of tools each worker will be less efficient due to having less tools to work with. Increasing physical capital will give each worker more tools and allow them to produce more. Due to increase in physical capital, productivity increases, which is one of the main things that drives economic growth. Increased investment in physical capital such as factories, machinery and roads will lower the cost of economic activity. Better factories and machinery are more productive than physical labor. This higher productivity can increase output. When investment in machinery, buildings, etc. increases, it results in greater productivity of inputs which in turn results in economic growth of a country. Physical capital plays an important role in the economic growth. Physical capital is a driving force in growing aggregate and per capita output. Thus, increased investment in physical capital has a positive impact on the economic growth of a country.