First, PWT assumes that when a country's data are first observed, its nominal
capital-output ratio is 2.6, based on contemporaneous evidence (Feenstra et al.
Values for [[theta].sub.k] = 0.5459 and [[theta].sub.a] = 0.1251 are chosen to match the
capital-output ratio and robot-to-capital ratio in the data.
If one recognizes that there is an existing
capital-output ratio for efficient operation, and if one assumes full employment of existing capital at the start, it is true that an increase in demand will raise output and thus induce the requirement for new capital, or investment.
As the best available data source on unsecured versus secured credit is available at annual frequency, I calibrate the model annually and set [delta], [alpha], and [beta] in a standard fashion to match plausible values of capital depreciation, factor income shares, and the
capital-output ratio, respectively.
The lower level of national investments, measured in international currency has a negative impact on the
capital-output ratio. There is also a short-term negative impact on real wages due to an increase in the price of imported products.
We choose the values of preference parameters [rho], [gamma], [lambda], and [beta] in such a way that our model economy's
capital-output ratio matches that of the U.S.
Barrell (2009) illustrates that the magnitude of the output scars suffered from this channel depend both on the magnitude of the rise in the user cost of capital and on the initial
capital-output ratio of the economy.
It helps to make consistent two empirical regularities: a capital-labor ratio that rises through time with a
capital-output ratio that stays rather constant (Romer 1989).
A sampling of topics: the gains from international trade, protection and real wages, a reconsideration of the theory of value, the basic theorems of classical welfare economics, the economic implications of learning by doing, economies with a finite set of equilibria, and the influence of the
capital-output ratio on real national income.
Next we explore how the
capital-output ratio changes in the model.
It includes, such factors as: (i) productivity, (ii) input-output ratio, and (iii)
capital-output ratio. These are described in Table-6.
From the naive accelerator theory we have I = v[DELTA]Y, where v is the
capital-output ratio. Equating the two equations for investment provides a growth path for income that is driven mainly by savings, as the
capital-output ratio is constant, i.e., Y = A[e.sup.(s/v)t], where t is time, and s/v is the warranted-growth rate.
