Better Ideas Generate More Output and More Capital Accumulation Better ideas shift the output curve up, which means that (1) more output is produced from the same capital stock so (2) output increases directly from point a′ to point b′ More output also means more investment so the investment curve shifts up (3).
Since investment is now greater than depreciation, the economy begins to accumulate more capital and thus to grow (4). The economy grows until investment is again equal to Depreciation at point c and output is at point c. Notice that better ideas increase output directly because of higher productivity and indirectly due to more capital accumulation.
Since investment is now greater than depreciation, the economy begins to accumulate more capital and thus to grow (4). The economy grows until investment is again equal to Depreciation at point c and output is at point c. Notice that better ideas increase output directly because of higher productivity and indirectly due to more capital accumulation.