Equations to determine the rate of investment are needed to close the model of Ch. 6. There seems to be no generally accepted theory of long‐run saving and investment. The capital stock adjustment principle makes investment respond to output, whereas we require causation to flow in the opposite direction. A simple Ramsey approach is adopted, faute de mieux, in which a utility function determines the rate of discount, which is equated to the marginal rate of return. There are then eight equations to determine eight endogenous variables.
Keywords: capital stock adjustment principle; investment; long‐run saving; Ramsey; rate of discount; rate of return; utility function
Chapter. 13342 words. Illustrated.
Subjects: Economic Development and Growth
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