The Saturation Of The Capital

What is capital saturation

Saturation of capital is happening in the economy, when the real income is quite high and is expected to continue to grow, which in turn leads to the General public, corporations and even government agencies to focus on consumption rather than on savings. This combination can lead to a stronger economy, but it may eventually lead to an economic bubble.

Breaking capital saturation

Saturation of capital, partly due to the significant level of real income, which is the profit after accounting for the effects of inflation on purchasing power. For example, if you receive a 4% salary increase compared to the previous year, and inflation is 2%, your real income increases by 2 percent. Against the background of low inflation may accelerate the saturation of the capital, because it leaves more spending money in the hands of consumers and businesses.

More often, however, the saturation of capital is associated with low interest rates. Low price, usually to encourage spending and do not contribute to the accumulation. Instead of earning low returns on savings accounts or investments with fixed income, for example, many consumers will choose to spend money on higher ticket items, while the company to increase its capital expenditures and to achieve, to create more jobs.

Although it may seem the perfect backdrop in which we live and work, saturation of capital can ultimately lead to a massive problem. Because of the impact, saturation of capital can cause economic boom that ultimately reaches a state of euphoria, as a result, the economy has become completely dependent on the current state of prosperity. If the increased consumption of too hard or too fast decreases, possibly due to economic shock or higher interest rates, a large number of companies will remain excess capacity in the hall. At the same time, consumers can find themselves overextended in credit. A departure from the bubble-economy, ultimately, can lead to the breast as a historical example of how the Great depression of the 1930-ies and the great recession of 2008-2009.

The principle of acceleration of capital consumption

The principle of acceleration is an economic concept that draws a connection between the rate of change of consumption and investment in fixed capital. According to the principle of acceleration, if the demand for consumer goods increases, then the percentage change in the demand for machines and other investment necessary to make these goods will increase even more. In other words, if the income and thus increases consumption, would be appropriate, but magnified change in investment. It is important to note that this principle does not allow to calculate the rate of change of investment in fixed capital as a product of the overall level of consumption, and as the product of the rate of change of consumption level.

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