How does improvement in the quality of capital affect economic growth?

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pohnpei397 eNotes educator| Certified Educator

An improvement in the quality of capital will be likely to increase the rate of economic growth.

Capital is one of the three factors of production.  Things are made using land, labor, and capital.  Capital is typically defined as things that are made by human beings which are then used to produce goods and services for sale to consumers.  Thus, things like the machines that are used to make cars are examples of capital.

Of course, not all capital goods are equal.  A person with a regular wrench will not be able do a given procedure in the process of making a car as well or as quickly as a person with a high tech automated wrench that delivers exactly the right amount of torque for exactly the right amount of time.  The person with the high tech wrench will be much more productive.  We say, therefore, that the quality of capital of the high tech wrench is much higher than that of the regular wrench.

When capital improves in quality, economic growth occurs.  If we have better tools that work faster and more accurately, our economy will be more productive and our economy will grow faster than it would if we had a lower quality of capital.