The basic models of growth assume that capital leads to faster growth rates rather than using...

The basic models of growth assume that capital leads to faster growth rates rather than using labour

provide one specific real world example that contradicts this theory

Expert Solution

Economist refers to capital as assets – the physical tools, plants and equipments that allow for increased work productivity. Capital comprises one of the major factors of production. The others being land, labour and entrepreneurship. Examples of capital include computer, trucks and railroads etc. Increasing productivity through improved capital equipments, more goods can produced and the standard of living.

Increased amount of capital is now available for production per unit of labour employed. Accumulation of capital has been a target of all development efforts. Increase in capital stock is not taking place uniformly at the same rate in all sectors of the economy.

Example: The investments in agriculture are at a slower rate than the investment growth in manufacturing sector. The investments in some of the services are even faster than in manufacturing.

More Capital Intensive Sectors attract more capital. Service sector acceleration cannot happen without more investment. Investment in capital intensive sectors may finally lead to changes in technology, even labour intensive sectors and productivity gains.

Example: The great migrations from rural to urban areas, even in economics such as China, after all, reflect such response in the economy.

The other significant channel impact of capital accumulation on the productivity across sectors is the investment in infrastructure. Infrastructure sectors either provide services directly or make their capital stock as input to all the other sectors in the economy.

Example: If bridges are built, urban infrastructure improves, railways run longer and more frequently and there is more power that can be actually put to use, the labour productivity of all the sectors that use such infrastructure should improve because either newer technologies can be adopted or the same stock of labour can be used more effectively.

Rahul Sunny answered 1 year ago

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The basic models of growth assume that capital leads to faster growth rates rather than using...

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