Capital deepening
Raising the amount of capital per worker. It lifts output per worker, but each addition adds less than the last, so on its own it cannot sustain growth indefinitely.
Where you will meet it
Capital deepening appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Contrast technological progress with capital deepening and explain how each drives growth and labour productivity
“Capital deepening means more capital per worker; it raises labour productivity, but diminishing marginal returns mean each extra unit adds less, so it lifts the level of output per worker without sustaining its growth.”
- Show how growth accounting can be used to forecast potential GDP
“The traps are swapping the weights and adding TFP on top of labour productivity growth, which already contains TFP and capital deepening.”
- Explain how spending on human capital, physical capital and technology development feeds economic growth
“Physical capital raises output per worker through capital deepening, and in the neoclassical model its effect on growth fades as diminishing returns set in.”
Practise it
Practise capital deepening until it is automatic: questions that explain every wrong option.
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