Question

What is capital deepening?

Short answer

Capital deepening is the process of increasing the amount of capital per worker in an economy, leading to a higher capital-labor ratio and capital intensity. This can result in higher productivity and economic growth, as workers have access to more resources, tools, and technology. However, the effects of capital deepening are subject to diminishing returns, and other factors, such as technological innovation and education, also play crucial roles in long-term economic growth.

Step-by-step solution

Understand Capital

Capital refers to the physical resources, such as machines, buildings, and tools, which are used to produce goods and services in an economy. In general, having more capital available for production can lead to higher levels of productivity and economic growth.

Recognize Labor Input

Labor input, or labor force, refers to the number of workers employed in an economy or a production process. It represents the human capital involved in creating goods and services.

Define Capital Deepening

Capital deepening is the process of increasing the amount of capital per worker, which means each worker has access to more resources or tools to carry out their job. This is associated with an increase in capital intensity. Capital deepening can lead to higher productivity and economic growth, as workers are able to produce more goods and services using the additional capital.

Notice the Role of Investments

Achieving capital deepening in an economy requires investments in new capital goods, such as machinery, technology, or infrastructure. This growth in capital stock should exceed the growth of labor force, resulting in an increased capital-labor ratio.

Illustrate with Examples

Consider a factory that produces smartphones. Initially, each worker has access to one machine that produces 50 smartphones per day. Now, if the factory invests in more machines or upgrades the existing machines, each worker might be able to operate five machines that produce 200 smartphones per day. This process of investing in capital and increasing the capital per worker is an example of capital deepening.

Understand the Limitations of Capital Deepening

While capital deepening can lead to higher productivity, its effects are subject to diminishing returns. At some point, adding more capital per worker may not result in as significant an increase in productivity. Additionally, capital deepening alone may not be sufficient for long-term economic growth, as technological innovation, education, and other factors also play crucial roles.