Investment Sector

Purpose and Perspective

The Investment sector represents the mechanism of allocation of private investment among the production sectors. Private investment in the model also includes investment in public enterprises producing marketable goods and services. Investment allocation is based on changes in the rate of return on investment from each sector, defined as the ratio between capital remuneration and capital invested in the sector. The share of capital remuneration (and the labor share) is estimated as a function of total factor productivity and capital-output ratio in each sector.

Model Structure and Major Assumptions

  • Investment allocation in each sector depends on the rate of return on investment [1]

  • Labor share is a function of total factor productivity and capital-output ratio (stemming from the agriculture, industry, and services and unemployment [2]

Exogenous Input Variables


Initialization Variables

  • Initial investment share bias – Units: Dmnl

Modeling Details

Although we consider expected profits as a driver of investment, we do not assume that investors have perfect information about the market and correctly anticipate future conditions towards satisfying a set of optimization conditions. Rather, we assume that investment behavior changes gradually, as rate of profit changes, and the intensity of such change is based on empirical observation.

Footnotes and References

[1] Arrow, K.J. (1964). Optimal capital policy, the cost of capital, and myopic decision rules. Annals of the Institute of Statistical Mathematics, 16(1): 21-30.

[2] International Labour Organization (2013). Global Wage Report 2012/13: Wages and equitable growth. Geneva: International Labour Office.

Karabarbounis, L., & Neiman, B. (2013). The Global Decline of the Labor Share. NBER Working Paper No.19136.

OECD (2012). Labour Losing to Capital: What Explains the Declining Labour Share?. Employment Outlook.