Capital Accumulation

Definition

Capital accumulation refers to the process of increasing the total stock of capital goods, such as machinery, equipment, and infrastructure, within an economy. It is a crucial driver of economic growth and development, as the expansion of productive capacity allows for increased production and higher standards of living.

5 Must Know Facts For Your Next Test

1. Capital accumulation is a key driver of the relatively recent arrival of economic growth, as it has enabled the expansion of productive capacity and technological advancement.
2. Increased capital accumulation leads to higher labor productivity, as workers have access to more and better tools and equipment, which in turn supports economic growth.
3. Economic convergence, where poorer countries catch up to richer countries, is often facilitated by capital accumulation, as developing nations invest in infrastructure and productive capacity.
4. Improving countries' standards of living is closely tied to capital accumulation, as it allows for the production of more goods and services, and the development of critical infrastructure.
5. The rate of capital accumulation is influenced by factors such as the level of savings, the efficiency of investment, and the availability of credit and financing.

Review Questions

• Explain how capital accumulation has contributed to the relatively recent arrival of economic growth.
  • Capital accumulation has been a crucial driver of the relatively recent arrival of economic growth. As economies have invested in machinery, equipment, and infrastructure, they have been able to expand their productive capacity and technological capabilities. This has allowed for increased production and the development of new, more efficient methods of converting inputs into outputs, leading to higher levels of economic growth and development.
• Describe the relationship between capital accumulation and labor productivity.
  • Capital accumulation and labor productivity are closely linked. As economies invest in more and better capital goods, such as machinery and equipment, workers have access to more efficient tools and technologies. This allows them to produce more output per unit of labor input, leading to higher labor productivity. The increased productivity, in turn, supports further economic growth and the potential for higher standards of living.
• Analyze how capital accumulation can facilitate economic convergence between poorer and richer countries.
  • Economic convergence, where poorer countries catch up to richer countries, is often driven by capital accumulation. Developing nations can invest in building up their infrastructure, productive capacity, and technological capabilities, allowing them to increase their output and productivity. As these investments in capital accumulation occur, poorer countries can narrow the gap in living standards and economic development compared to their more prosperous counterparts, facilitating the convergence process.

Related terms

Savings: The portion of income that is not consumed and is instead set aside for future use, which can be invested to facilitate capital accumulation.

Investment:

The commitment of resources to the production of goods and services, with the expectation of generating a future return, which is essential for capital accumulation.

Productivity:

The efficiency with which inputs, such as labor and capital, are transformed into outputs, and is closely linked to the level of capital accumulation in an economy.