Consider an economy whose residents own an aggregate capital stock
of 340 billion which depreciates at the rate of 10 percent per year.
Suppose that each unit of capital stock produces 0.15 units of
output. What is the level of income produced by the capital owned
by the residents of this economy?
The correct answer is 17 billion. Since 0.15 units of aggregate output
is produced by every unit of aggregate capital stock owned, the level
this output will be 51 billion. Depreciation will equal 10 percent of
that capital stock, or 34 billion. Income of domestic residents will
equal the output from the capital they own minus its depreciation, or
17 billion.
Notice that the capital stock in question is the stock owned by domestic
residents and not necessarily the stock employed in the domestic economy.
Domestic residents may own capital abroad or foreign residents may own
capital employed in the domestic economy, or both may be the case.
The level of income is thus Net National Product, not Net Domestic Product
as was the case in Question 1.
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