Capital Accumulation and Economic Growth

Overview In this chapter we examine the relationship between increases in the capital stock and economic growth. We first discuss whether an economy can always grow if it increases only its capital stock. Under certain plausible assumptions, we show this is not possible, and that poorer countries should therefore grow faster than wealthy ones, whose economies will depend more on technological progress than capital accumulation. We then discuss why countries with high investment rates also have high standards of living. We show that to have a high standard of living a country must, over the long run, have a high level of savings and investment. We then examine why some countries have such low savings rates and whether governments can alter this. Finally we consider the rapid growth of the Southeast Asian economies and the extent to which they have relied on capital accumulation.