The optimal level of investment is the rate that generates the highest sustainable level of consumption over time. That, in turn, depends on a country’s “marginal product of capital”, or how much output is produced by new investment. The higher this measure, the more it should invest. Assuming extra investment increases output by progressively smaller amounts as the capital stock expands, then at some point extra investment will reduce, not increase, the long-run sustainable level of consumption.
Monday, January 25, 2010
Good Words on Investment and Growth
From the Economist: