What is meant by "quality (of capital) per worker”? How does improvement in the quality of capital affect economic growth?
Quality of capital per worker is an important factor in creating economic growth. As the quality of capital per worker increases, productivity increases and economic growth occurs. To understand why this is, let us look at the meaning of the term.
In economic terms, “capital” refers to anything that is made by humans and is then used to make goods and services to be sold to consumers. In other words, capital is made up of things like tools. If a baker uses an electric mixer and an oven to make cakes, the mixer and oven are the baker’s capital. If a computer programmer uses a PC to write programs to sell to the public, that PC is their capital.
The quality of capital per worker is a measure of how much capital exists in an economy and how good that capital is. Imagine, for example, the difference between an economy where bakers are using wooden spoons to mix their cakes and one in which they use electric mixers. The former economy has a much lower quality of capital per worker because its capital (the spoons) is not as good as the other economy’s capital (the mixers).
If an economy improves its quality of capital per worker, it will experience economic growth. This is because the workers will be able to make more goods and services with the better capital. Looking again at the example of the baker, the mixers would allow them to mix up cakes more quickly, leading to the production of more cakes per day. If this happened across the economy, it would result in economic growth.