Question

Intermediate Macroeconomics

1. Explain the difference between capital deepening and capital widening.

Answer 1

Capital deepening refers to increase in capital stock per worker or increment in capital-labour ratio by adopting better technology and higher output per unit.
Capital deepening requires investment in technology improvement.

Where capital widening is when capital stock and labour force grows simultaneously.
Capital widening is done by investing more but remaining constant to existing technology.

Capital deepening will lead to rising in labour productivity where capital widening leads to constant value of labour productivity.

For example:
A firm has one machinery that produces 100 units of output and requires 10 workers.
Here the present productivity of 1 worker is 10 units (100/10).
(a) Here firm decides to invest in improving technology and modify machinery.
Now that machinery is able to give 150 units of output, and productivity of 1worker is increased to 15 units.
This is capital deepening.

(b) here firm doesn't improve technology but buys 1 more machinery by investing capital in existing technology.
Now 2 machinery will give 200 units of output but requires 10 workers to operate each.
Now productivity of 1 labour remains constant to 10 units.
This is capital widening.

Economic growth is supported by capital deepening as it increases productivity of labour.

Good luck.