Question

Can a continuous addition of new capital stock be a source of long-run economic growth in an economy? Explain your answer using per worker production function diagram.

Answer 1

we can state that economic growth can be represented by the GDP of a country.capital is an immense requirement for any business and so does the worker.

increase in capital stock helps in getting increase in production but not in same proportion and upto a certain point.

initially when there is no capital investment and hence there is no output or no economic development. but when the capital is introduced in the production function then it leads to increase the GDP level at increasing level at made the per person production line steeper. but as we keep introducing the capital then we get the production increase but the increase is less than the earlier level because there is a diminishing return to capital.

As we can observe from the above diagram at point of origin the production is zero but as we introduce the capital and its element the production increases but we can also see that At point A the increase with a determined number is higher compare to B and further C because of diminishing return.therefore in the long run increase in capital stock may leads to increase in the total output and helps us to gain the economic growth and development but upto a certain limit with diminishing return principle may hundle and slow down the process.

now if the technology improves or the firm adapts for a new innovative machinery then it could increase its production as shown in the diagram.