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Robert Fairholm The Centre for Spatial Economics June 2005

Investment and Growth. Direct Link Between Investment and GrowthDemandInvestment Component of Gross Domestic ExpenditureGDE=C I G (X-M)SupplyCapital One of the Factors of ProductionCapital is accumulated when Gross New Investment Exceeds Depreciation of Existing Capital Long-Term Growth Deter

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Robert Fairholm The Centre for Spatial Economics June 2005

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    1. Robert Fairholm The Centre for Spatial Economics June 2005

    2. Investment and Growth Direct Link Between Investment and Growth Demand Investment Component of Gross Domestic Expenditure GDE=C+I+G+(X-M) Supply Capital One of the Factors of Production Capital is accumulated when Gross New Investment Exceeds Depreciation of Existing Capital Long-Term Growth Determined by Supply Side Growth Theories Focus on Supply Side

    3. Growth Theories Neoclassical Model--Solow (1956, 1957) The Three Central Assumptions Constant Returns To Scale Perfect Competition Exogenous Technological Change Role Of Investment Summarized By Two Equations: Production Function and Capital Accumulation Production Function: Relationship Between Output, Technology and Capital and Labour Inputs Capital Stock Equation Relates Investment to Capital Accumulation

    4. Neoclassical Model Growth Determined By Accumulation Of Capital And Labour Along With Technical Change. Technical Change Is Calculated Residually Is Assumed To Grow Regardless Of The Pace Of Accumulation In The Factors Of Production Accumulation Of Capital Will Directly Contribute To Economic Growth Based On Its Share Of Income

    5. New Growth Theory Endogenous growth theory is an equilibrium model of endogenous technological change in which long-run growth is driven primarily by the accumulation of knowledge by forward-looking, profit-maximizing agents. Romer (1986). Spillovers Or Externalities Exist Because Knowledge Cannot Be Perfectly Patented Or Kept Secret

    6. New Growth Theory Three Drivers of Long-Term Growth Proposed: Machinery and Equipment Human Capital Research and Development Hybrid Models with Two Or More Drivers Others Linked Openness To Trade With Capital Accumulation To Explain Economic Growth

    7. Research Follows Dual Track Based On The Two Schools of Thought Neoclassical--Concept of Investment Broadened Investment is the commitment of current resources in the expectation of future returns and can take a multiplicity of forms. --- Jorgenson (1996) Some New Growth Theory Proponents Explored Spillover Effects From Investment Spending Empirical Research

    8. Results-Jorgenson Jorgenson and Stiroh (2000) included 57 types of private investment assets. Found that after accounting for this expanded list of investment categories, the accumulation of tangible assets is the most important source of growth. Jorgenson (2004) extended this research to the G7 group of nations investment in tangible assets is the most important source of economic growth in the G7 nations. The contribution of capital input exceeds that of productivity for all countries for all periods.

    9. Sources of Economic Growth For G7

    10. Sources of Labour Productivity Growth For G7

    11. ResultsDe Long & Summers De Long and Summers Explored Relationship Between M&E Investment, Productivity and Long-term Economic Growth To See If There Were Positive Spillovers From M&E Investment Concluded That The Social Return To Equipment Investment Is Large And Exceeds The Private Return Results: Increasing M&E Investment Share By 1% Increases Long-run Productivity Growth By 0.2%-0.3% De Long (1991) Replicated The Analysis For Industrialized Nations From 1870 To 1979. Found Similar Results 1% Rise In M&E Investment Share Leading To A 0.7% Rise In GDP Per Capita

    12. Why Investment Matters Conference

    13. Empirical Results Abdi (2004) Found Strong Short-and Long-term Relationship Between M&E Investment, Economic Growth and Total Factor Productivity Growth In Canadian Manufacturing. Elasticity Of Output With Respect To Capital Stock M&E 0.67 Non-M&E 0.24 Both Above Their Share Of National Income Found Investment Positively Affects TFP M&E Investment Raises TFP by 20% Non-M&E Investment Raise TFP By 23%

    14. M&E Investment Boosts Productivity

    15. Empirical Results Li (2002) Found A 1% Rise In The Investment Rate Leads To A 0.2% Rise In Long-term Growth Sargent And James (1997) Found The Estimates For The Elasticity Of Output With Respect To Capital Were In The Range 0.610.88, Which Is Well Above Capitals Share Of National Income

    16. Summary The available empirical evidence supports the view that capital accumulation boosts short-to-medium economic growth as well as long-term economic growth and productivity Several studies corroborate the view that machinery and equipment investment is particularly important for productivity and long-term economic growth

    17. Capital Deepening Helps to Boost Living Standards

    18. Canada Lags Behind Other G7 Nations

    20. Robert Fairholm The Centre for Spatial Economics June 2005

    21. Why Investment Matters for Ontarians

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