Net investment refers to the absolute change in the capital stock of a firm (I = ΔK = Kt – Kt-1,). user cost) of capital (r/P). Because it takes time to build and install new machines, construct new factories, warehouses etc., the firms cannot immediately achieve the desired level of capital stock. It may be recalled that fixed business investment refers to the purchase of machines, construction of new factories, warehouses, office buildings etc. For example, a favourable technological change which raises the MPK increases the amount of capital goods that lease-renting firms desire to buy at the same real rate of interest. Share Your Word File
Marginal product of capital (MPK) measures the addition to the production by using an additional unit of capital, labour and technology remaining constant. The equation (2) shows that desired capital stock depends on the level of output (Yt). Our mission is to provide an online platform to help students to discuss anything and everything about Economics. The flexible accelerator model can also be modified to allow for changes in the speed with which investment is carried out (that is, the change in fraction λ is in fact the choice variable for the firm which is affected by such factors as the availability of credit, rate of interest, corporate tax rate, investment tax credit etc. Therefore, the firms make some adjustment in the capital stock in each period to finally attain the desired capital stock over time. In a series of papers1Jorgenson has advanced what he calls ‘the neoclassical theory of investment’. Therefore, as long as the value of marginal product of capital (which are in fact marginal receipts or benefits it gets from the use of capital in production) exceeds the rental or user cost capital, it will be profitable for the firm to add to its stock of capital. Marginal product of capital can be obtained by differentiating the production function with respect to labour. It also considers the growth of the resources in the long term. The speed of adjustment toward the steady state depends on the speed with which firms adjust their capital stock. 18.3(b) to shift to the right to I’. An important such hypothesis is called flexible accelerator model. The neoclassical theory of management took the human factor into account. There is no point in buying this machine at a high cost. The interest cost is iPK where i is the nominal interest rate and PK is the purchase price of a unit of capital. 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