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posted on 04 October 2015

Where Does The U.S. Economy Currently Stand In Terms Of Capital Accumulation?

from the Chicago Fed

One manifestation of economic growth has been the increase in the capital-labor ratio - the quantity of equipment and other productive assets available for each worker to produce goods and services. Over the past four decades, we have also observed a significant increase in the capital-output ratio - the quantity of productive assets relative to GDP.

The increase in these capital ratios reflects the accumulation of assets thanks to higher productivity - in particular the availability of cheaper, more efficient capital goods, such as computers. In turn, these higher capital ratios allow higher productivity and a higher standard of living per worker.

However, relatively weak business investment over the past few years has led to a slowdown in the growth of the capital stock. Views differ on how to interpret this fact. Some argue that the weak investment is the consequence of excess investment experienced before the recent recession. Others argue that it merely reflects weak output growth, owing perhaps to contemporaneously deficient demand or lower productivity growth. And some believe that the under-accumulation of capital means the U.S. economy is poised for a large increase in investment if the current expansion continues. This leads us to consider two questions. First, where does the U.S. economy currently stand in terms of capital accumulation? And second, what does this tell us about future investment?

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