Capital Deepening?

@vincentt I am an economics major and I am hating this stuff. And I think in some point in time before CFA I actually liked economics.

@alta12 It would, but it won’t be.

Yes, Y/L = GDP output per labour. It’s just dividing the classic output equation with L.

Hi @vincentt, capital deepening is the increase in capital (K) to labour (L) ratio that brings a movement along (to the right of) the productivity curve.

So let’s take a look at the the production function: Y = AK^α L^(1-α)
Let’s transform that equation to get K/L (capital deepening): Y/L = A(K/L)^α

** PS – I couldn’t get superscript to work somehow, so take ^ as sign for superscript. Hope it’s not confusing.

So if you apply a neat math operation called “first difference of log” (not important for CFA exams), you can transform this relationship to a % change one:

% change in Y/L [output per labour or labour productivity] = % change in A [TFP] + % change in α(K/L) [capital to labour ratio]

Hence that’s how you get the “capital deepening” (or change in capital to labour ratio) formula.

Country A @vincentt.

Did you read my derivation above? It proves that it’s growth in labour productivity less growth in TFP = growth in capital to labour ratio (another name for capital deepening).

:)) now you’ll ace it!

@vincentt wouldn’t 5-10% mean that it can be up to 2 item sets?