Question

Problem 9-2: A nation’s capital goods wear out over time, so a portion of its capital goods become unusable every year. Last year, its residents decided to produce no capital goods. It has experienced no growth in its population or in the amounts of other productive resources during the past year. In addition, the nation’s technology and resource productivity have remained unchanged during the past year. Will the nation’s economic growth rate for the current year be negative, zero, or positive?

In the situation described in Problem 9-2, suppose that vocational training during the past year enables the people of this nation to repair all capital goods so that they continue to function as well as new. All other factors are unchanged, however. In light of this single change to the conditions faced in this nation, will the nation’s economic growth rate for the current year be negative, zero, or positive?

Answer 1

The process when a nation's capital goods wear out over time, is called depreciation, which means that capital goods become unusable every year according to the fraction of depreciation.

Now, in the above mentioned case, a country doesn't experience growth in population or productive resources, and also other factors that could add to the economic growth, namely technology and resource productivity have remained stagnant ; so there is no growth at all from any sector, but there is depreciation which would mean negative economic growth to the extent of depreciation.

In the second problem, vocational training in the past year enables the people of this nation to repair all capital goods so that they continue to function as well as new. It would mean that there is no depreciation and thus the economic growth of the nation would be zero.