LEARNING OBJECTIVES
After you have read this section, you should be able to answer the following questions:
What determines the movement of investment in a country?
How does the capital stock of a country change?
What determines the movement of capital across countries?
Many of the arguments that we have just made about labor have analogies when we think about capital. Just as the amount of labor in an economy depends on the size of the workforce, so the amount of capital depends on the capital stock. Just as the amount of labor depends on how many hours each individual works, so the amount of capital depends on the utilization rate of capital.
Capital utilization is the rate at which the existing capital stock is used. For example, if a manufacturing firm runs its production lines 24 hours per day, 7 days per week, then its capital utilization rate is very high.
Just as labor can migrate from country to country, so also capital may cross national borders. In the short run, the total amount of capital in an economy is more or less fixed. We cannot make a significant change to the capital stock in short periods of time. In the longer run, however, the capital stock changes because some of the real gross domestic product (real GDP) produced each year takes the form of new capital goods—new factories, machines, computers, and so on. Economists call these new capital goods investment.
Toolkit: Section 16.16 "The Circular Flow of Income"
Investment is one of the components of overall GDP.
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