The Growth Rate of the Capital Stock Capital goods are goods such as factories, machines, and trucks. They are used for the production of other goods and are not completely used up in the production process. Economies build up their capital stocks by devoting some of their gross domestic product (GDP) to new capital goods—that is, investment. As we saw in our discussion of Solovenia in Section 6.2 “Four Reasons Why GDP Varies across Countries”, if a country does not interact much with other countries (that is, it is a closed economy) the amount of investment reflects savings within a country. In open economies, the amount of investment reflects the perceived benefits to investment in that country compared to other countries. Capital goods wear out over time and have to be scrapped and replaced. A simple way to think about this depreciation is to imagine that a fraction of the capital stock wears out every year. A reasonable average depreciation rate for the US economy is 4 or 5 percent. To understand what this means, think about an economy where the capital stock consists of a large number of identical machines. A depreciation rate of 5 percent means that for every 100 machines in the economy, 5 machines must be replaced every year.
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