Chapter 9 continued 27 02 2014 10 46 00 Increase the Capital Stock Rising productivity is the most important determinant of long run An increase in the capital stock increases capital per worker and economic growth increases productivity Capital per worker o Increase the flow investment to increase capital stock o Total capital stock divided by total employment What determines how fast the capital stock rises Planned investment spending o Recall this is a How to increase investment Gov t can do three things o Increase incentives to invest for business o Increase incentives to save for households o Shrink the budget deficit o Think about the loanable funds model presented in chapter 8 Target businesses increase incentive to invest Lower corporate profits tax o A tax on the profits earned by corporation 1 Give investment tax credit o A reduction in taxes for firms that invest in new capital Ex For every 10 million you invest your tax bill goes down by a million 2 Target households increase incentive to save o Decrease capital gains tax rate o Switch to a consumption tax Result More household saving More funds available for investment Faster growth in the capital stock Faster growth in living standards 3 Decrease the budget Human Capital and economic growth An increase in human capital o Works like an increase in physical capital to increase output o Causes production function to shift upward o Can raise productivity and living stanrd Increase rate of Limits to growth from new capital Diminishing returns Depreciation Thus increases in the capital stock alone cannot create permanent high rates of economic growth Technological change methods Invention and use of new inputs new outputs or new production Two effects on the production function o Increase in production from increasing the amount of capital holding technology constant o Extra boost to production from the new productivity enhancing technology that comes with that capital The cost of economic growth Unavoidable tradeoffs Promoting economic growth requires some groups or the nation as a whole to give up something else that is valued Properly targeted tax cuts can increase the rate of economic growth but force us to either redistribute the tax burden or cut government programs 27 02 2014 10 46 00 27 02 2014 10 46 00
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