The faster labour grows, the greater the output that can be produced, given the size and efficiency of the capital stock. The size of the initial capital stock will help to determine the size of GDP that can be produced. The higher the rate of depreciation , the smaller the capital stock will be at the end of the year, unless it is replaced by new investment. Another key parameter is the rate of gross investment, the total amount spent on new equipment and structures. You are asked to set the annual rate of gross investment , stated as a fixed percentage of the stock that has survived from the previous year.
Gross investment has to be financed, of course.
It is funded from saving, which comes out of income, and income is essentially GDP minus depreciation. Whatever is left over, after saving is taken out of income, is available for consumption. Top of Page You are now asked to choose the annual global rate of improvement in technology. This can be thought of as improving the state of knowledge, but it will not actually influence the efficiency of production until it is embodied in the stock of labour and capital through investment. The module assumes that gross investment each year incorporates the latest state of technology.