Questions tagged [capital]

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Market for capital goods of housing: Name of the model

I am searching for a model of the market for capital goods applied on purchase prices, rents, and supply of new housing. The model, operating in continuous time, considers prices as a function of ...
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From Cobb-Douglas Production Function to Profit Function

A firm's output is given by the Cobb-Douglas production function $$Y_t=X_tK_t^{\alpha_K} L_t^{\alpha_L}$$ where $\alpha_K\approx\frac{1}{3}$ is the capital share and $\alpha_L$ the labor share. ...
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What does the second differential of the marginal rate of capital mean in the 'real world'? What's the explanation?

$\frac{\partial^2f}{\partial k^2}$ Marginal Rate of Capital means the extra production from adding a unit of capital. Assume f(x) here means production. What does the second differential mean, if ...
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Costly capital adjustment

Why do we need to take FOC w.r.t both $K_t$ and $I_t$ in presence of costly capital adjustment when capital accumulation follows $ K_t = (1-\delta)K_{t-1} + \Biggl[1-S\left(\frac{I_t}{I_{t-1}}\right)\...
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Capital share of income and profit margins

The capital share of income is defined as gross operating surplus divided by nominal GDP. At the firm level, the profit margin is defined as profits divided by sales. Notwithstanding the fact that ...
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Does discount rate and cost of capital mean the same thing to compute levelised cost of energy (LCOE)?

I came to understand that cost of capital and discount rate are two different parameters, although they are also used ...
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1 answer
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Loss absorption via Common Stock

As a primer, I want to lay out my limited understanding of the topic: Common stock: is part of CET1 Capital of a bank used to absorp losses earlier than e.g. preferred stock and other types held by ...
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increased cost of non-labor inputs and the effect on the value of a commodity (according to the Labor Theory of Value)

According to the Labor Theory of Value, technical innovation in the production process lowers the value of a commodity -- insofar as technical innovation generally is aimed at producing cheaper ...
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we speak only of the investment capital market without the production capital market

In the investment capital market, we speak only of the investment capital market without the production capital market, question: is there a production capital market?
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What cause the capital-output ratio to be low in developing countries?

I'm now studying economic development and I wonder what is the causes of low ICOR in developing countries and high ICOR in advanced countries. Because it's about economic development so I need some ...
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WACC: forward looking vs. backward looking

I have learned from the thread "Cost of debt, taxes and WACC" that WACC is forward looking in that it disregards the interest rate on debt already taken by the firm but rather use debt's ...
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Does this example involving WACC make sense?

I have encountered the following example in the context of cost of capital: A firm is considering investing into a project that has the same risk profile as the rest of the firm's projects. It may ...
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Cost of debt: How to adjust YTM for the possibility of bankruptcy?

When calculating the weighted average cost of capital (WACC), it may be tempting to use the debt yield (yield to maturity, YTM) as the cost of debt. However, Berk & DeMarzo note in Chapter 12 of &...
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3 answers
2k views

Deriving and explaining the weighted cost of capital

The Wikipedia article for the "weighted cost of capital" (WACC) defines the WACC as "the rate that a company is expected to pay on average to all its security holders to finance its ...
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2 answers
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Does a private company that is 100% financed by a bank loan have a WACC equal to the interest rate?

When estimating a company's Cost of Debt for a Weighted Average Cost of Capital (WACC) calculation we normally look into its bond yield. But for a private company with 100% debt capital structure, ...
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1 answer
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Cost of debt, taxes and WACC

I am studying the cost of debt. Without loss of generality, suppose the debt consists of bonds. On the one hand, some textbooks (e.g. Hillier et al. "Fundamentals of Corporate Finance: 4th ...
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Why is a donation of cash preferred over an equivalent donation of labor?

Suppose you went down to your local animal shelter or homeless shelter and asked: I would be happy to volunteer 10 hours every weekend. I will perform general-purpose labor, meaning I will do any ...
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1 answer
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Investing and equity

I'm having trouble understanding how a typical investment works, and so far most textbooks are pretty vague with their language. Let's say you invest 200 dollars in a startup (let's start small). The ...
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3 answers
2k views

Cobb-Douglas Production Function - Finding units of labour to maximise production

Given production function $f(L,K)=16L^\frac{1}{4}K^\frac{3}{4}$, where each unit of labour costs £50 and each unit of capital costs £100 and you have a budget of £500,000. Find the number of units of ...
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Where can I find capital outflow data?

I'm studying capital outflow and I need to compare its growth from 1990 to 2014 in different countries. I can't find the data, please help
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Difference between Outflow of capital and Flight of capital

I may sound stupid to ask this question but pardon me for that. What's the different between Outflow of capital and Flight of capital? I googled about both terms but couldn't find how they differ from ...
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1 answer
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Calculation of labor, capital and productivity deviation

In Ohanian (2010): The Economic Crisis from a Neoclassical Perspective ( https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.4.45 ) I read about labor, capital and productivity deviation. I would like ...
1 vote
1 answer
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Budget line for mean variance utility

Consider the mean-variance utility used in CAPM. The budget line when allocating a risk-free and a risky asset is the line connecting the $r_f$ and the risky asset. Suppose that I have fixed amount ...
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1 answer
133 views

What is capital?

In Microeconomics, it is simple; capital is the means of production. Simple production functions have mainly two inputs: labour an capital. Capital is mostly fixed in the short run, and labour is more ...
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1 answer
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How is value determined?

If I create a new currency (perhaps a cryptocurrency) and I wanted it to be the only currency usable to purchase an item/service, how would I determine the price of that service? I would think that it ...
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1 answer
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Which model of capital accumulation do macroeconomists prefer, renting model or investing model?

Consider a closed economy with perfect competition, no government and no fiat money. Consumer goods are aggregated as a single type of goods and prices are measured in units of goods. For such an ...
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Why do derivative contracts represent no wealth?

I am currently reading "Market Microstructure" by Larry Harris and I'm new to Finance and Economics world. In the section about Magnitude of Trading (ch 3.4.1 p. 45) Larry Harris says that ...
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In the RBC model, why is household's problem dynamic?

Why is capital assumed to be a good accumulated in the current period t but being used in t+1? I think my interpretation is wrong here. I understand that households problem is dynamic because of this ...
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6 answers
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In GDP growth studies, are factors of production measured as stock or flows?

Consider the following cases: One machine (capital) is used by multiple producers within one year. For instance, farmers renting tractors from the same company. In this case, in terms of GDP, there ...
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What is the relation between "Capital Market Line" and "Capital Asset Pricing Model (CAPM)"?

I asked this question on Personal Finance and Money but was asked to ask it here. On the Coursera course Portfolio and Risk Management, on Week 2, I am having trouble finding the link between the ...
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1 answer
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What is the implication of perfectly reversible capital?

I am reading the lecture note in labor economics by Acemoglu and Autor. In the chapter of basic search model, they assume capital is perfectly reversible, and argue that "Perfect reversibility ...
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4 answers
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What happened when the money from share issuance is spent?

Let's assume that new bank is incorporated and it issued 100 000 shares with nominal value odf $100. Let's also assume that all shares are sold for the same price, so bank now has 10 million dollars. ...
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What is "industrial capitalism"?

What's the difference between "industrial capitalism" and "agrarian capitalism" and "mercantilism" and the "industrial revolution" and the 20th century ideas of "Keynesianism"? Is agrarian capitalism-...
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Treatment of natural disasters and wars in consumption of fixed capital

Assets destroyed by natural disasters and wars are not included in consumption of fixed capital (CFC) in the US NIPA or the UN SNA. Suppose though that the US decided to start including such asset ...
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4 answers
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How does capital investment (factory, plant, etc.) benefit the region they are located in?

Generally, capital investment is always good for the economy, but I am not sure about the underlying mechanism. For example, if a car factory is built in a certain state, does it improve the economy ...
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Capital accumulation equation in steady-state (OLG model)

So I was given a question to derive the equation for aggregate capital accumulation. $K_{t+1}$, and explain if the economy has a stationary steady-state with zero growth. The model is as follows, ...
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What is the state of the art in capital theory?

In the first half of the 20th century a great deal was written about capital theory, including writers such as Hayek, Böhm-Bawerk, Sraffa, Knight, Robinson and Fisher. Many of these figures debated ...
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What is the main difference between FDI and short run capital inflows/outflows?

What is the main difference between FDI and short run capital inflows/outflows? I feel like both are quite similar in their nature but I don't understand the distinction between the two fully. Many ...
4 votes
2 answers
741 views

What's the logic behind dividing rental price of capital and wage rate by price level?

I've just started to learn macroeconomics and I think even the teachers can't get what's the price level and why we divide by it in order to find for example real economic profits. Textbook says "...
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Static Profit Maximization Short Run Shut Down Decision

In considering whether to stay open or shut down in the short run, a firm compares its revenues to its “avoidable costs”. We usually think of these avoidable costs as variable costs, but of course ...
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What does it mean that households provide the four factors of production?

I've learned that the factors of production are Labor, Land, Capital and Entrepreneurship. I've also learned that households, or units of people living under one roof, supply these resources. But I'm ...
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What does "capital used as structure" means?

I'm in the progress of reading a paper and I came across the fragment below: Second, we assume that producers rent machines from a capital stock. Capital can also be used as structures in both ...
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Piketty's explanation of elasticity of substitution (from his book Capital in the 21st century)

I have some trouble following the explanation of the elasticity of substitution between capital and labor and its implications on p189. Take this part: The relevant question is whether the elasticity ...
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References on foreign ownership of domestic assets

In Piketty's Capital in the 21st Century, he occasionally analyzes the ownership of domestic assets by foreign countries. On p. 192, he writes: Japan and Germany have accumulated quite significant ...
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Was Adam Smith correct about the relative marginal productivities of capital in agriculture, manufacturing, and trade?

Adam Smith (1776): No equal capital puts into motion a greater quantity of productive labour than that of the farmer. After agriculture, the capital employed in manufactures puts into motion the ...
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Capital/Income Ratio in Pikketty's Capital

In Capital by Thomas Pikketty, https://www.robertdkirkby.com/blog/2015/summary-of-piketty-i/, he states that World War I and World War II were the main reasons why the Capital Income to Labour Income ...
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What's the difference of economic capital and liquidity buffer?

Economic capital is what for example a bank has and uses in order to stay solvent. Isn't this in a way a liquidity buffer? or what would be the difference between them?
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Solow model: effect on a sudden fall in population? [closed]

my question is, what happens in the Solow model when a sudden fall in population happens? let's say a bomb killed many people.
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1 answer
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In the context of banking, how (if at all) do the terms 'capital', 'net worth', and 'equity' differ?

In banking, are the three terms capital, net worth, and equity simply identical and exact synonyms? If not, how do they differ? (Aside: And what about in other contexts? For example, does the same ...
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Why does the bond market induce efficient allocation of capital?

Going from this quote by Bryan Collins of Fidelity on China's economy: One of the nice things we see from the development of a domestic bond market is that it starts the process of pricing ...