Definition capital widening
means that the capital stock will increase at the same rate as the labour force and lead to constant labour productivity (output per worker). Capital widening involves greater investment to make use of existing technology and increase the amount of capital available.
Capital deepening attempts to increase output through better technology and higher output per worker, for example, a new technology which makes capital more productive. The capital deepening will lead to rising labour productivity.
If we assume a constant labour force, economic growth requires capital deepening – higher output per worker – through technological improvements or greater efficiency of the productive process.
- Capital is a factor of production it is something that is used to convert raw materials into a finished product. An example would be a spinning machine which takes wool and makes a jumper.
- If a factory bought more spinning looms and built a bigger factory, then it is involved in capital widening.
- However, if a firm designed a new improved spinning loom (which required a smaller quantity of labour) then this would enable capital deepening because it would lead to a higher rate of return for the same inputs.
- In the computer industry, there is a constant investment to increase the productivity of micro-chips – giving higher processing power for the same inputs. This capital deepening increases productivity.
Economic growth models
- In endogenous growth models, capital deepening plays a crucial role in influencing the rate of economic growth. Capital deepening is an important aspect of development economics – as the ability to adopt better technology and increase labour productivity is important for enabling higher economic growth.