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Unformatted text preview: &$0/ # 'BMM %JTDVTTJPO 4FDUJPO /PUFT 1SFQBSFE CZ "JMJFO 5SBO BJMJFO@USBO!ZBIPPDPN 4FDUJPO BOE The capital stock changes from: Gross investment, which adds to the capital stock. Depreciation, which reduces the capital stock. Gross investment = net investment + depreciation. Net investment = gross investment depreciation: Kt +1 Kt = It dKt Net investment = the change in the capital stock. Can be re-written as It = Kt+1 Kt + dKt Now investment has two parts: It = K* Kt + dKt K* Kt : the desired net increase in the capital stock over the year, and dKt : the investment needed to replace depreciated capital. The marginal product of capital and user cost of capital also apply to housing and inventories as well as to equipment and structures. Desired investment will lead to Increase with an increase in the expected future marginal product of capital , MPKf , because the desired capital stock increases....
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- Fall '08