Capital deepening
Encyclopedia
Capital deepening is a term used in economics
to describe an economy where capital
per worker is increasing. This is also referred to as increase in the capital intensity
. Capital deepening is often measured by the capital stock per labour hour. Overall, the economy will expand, and productivity per worker will increase. However, according to some economic models, such as the Solow model, economic expansion will not continue indefinitely through capital deepening alone. This is partly due to diminishing returns and wear & tear (depreciation). Investment is also required to increase the amount of capital available to each worker in the system and thus increase the ratio of capital to labour. In other economic models, for example, the AK model
or some models in endogenous growth theory
, capital deepening can lead to sustained economic growth even without technological progress. Traditionally, in development economics
, capital deepening is seen as a necessary but not sufficient for economic development of a country.
Capital widening is a term used to describe the situation where capital stock is increasing at the same rate as the labour force and the depreciation rate, thus capital per worker remains constant. The economy will expand in terms of aggregate output
, but productivity per worker will remain constant.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
to describe an economy where capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
per worker is increasing. This is also referred to as increase in the capital intensity
Capital intensity
Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor...
. Capital deepening is often measured by the capital stock per labour hour. Overall, the economy will expand, and productivity per worker will increase. However, according to some economic models, such as the Solow model, economic expansion will not continue indefinitely through capital deepening alone. This is partly due to diminishing returns and wear & tear (depreciation). Investment is also required to increase the amount of capital available to each worker in the system and thus increase the ratio of capital to labour. In other economic models, for example, the AK model
AK model
The AK model of economic growth is an endogenous growth model used in the theory of economic growth, a subfield of modern macroeconomics. Around 1980s it became progressively clearer that the standard neoclassical endogenous growth models were theoretically unsatisfactory as a tool to explore long...
or some models in endogenous growth theory
Endogenous growth theory
Endogenous growth theory holds that economic growth is primarily the result of endogenous and not external force. In Endogenous growth theory investment in human capital, innovation and knowledge are significant contributors to economic growth. The theory also focus on positive externalities and...
, capital deepening can lead to sustained economic growth even without technological progress. Traditionally, in development economics
Development economics
Development Economics is a branch of economics which deals with economic aspects of the development process in low-income countries. Its focus is not only on methods of promoting economic growth and structural change but also on improving the potential for the mass of the population, for example,...
, capital deepening is seen as a necessary but not sufficient for economic development of a country.
Capital widening is a term used to describe the situation where capital stock is increasing at the same rate as the labour force and the depreciation rate, thus capital per worker remains constant. The economy will expand in terms of aggregate output
Output (economics)
Output in economics is the "quantity of goods or services produced in a given time period, by a firm, industry, or country," whether consumed or used for further production.The concept of national output is absolutely essential in the field of macroeconomics...
, but productivity per worker will remain constant.