The Interplay of Employment and Replacement Effects

If only welfare generating part of final output (i.e. consumer goods) is considered, two dynamic effccts represent two opposing forces. The production of a given basket of consumer goods B requires more social labour time (increased demographic investment) when labour force is increasing under full employment. It also requires les social labour time when the rate of growth is higher because replacement per unit of capital decreases with the rate of growth (1/n for stationary economy, 1/v for the growing one). To disentangle these effects, consider two simple models, one for a stationary and one for a growing economy. Let gestation period of investment be n _g = 1 year and the life span of fixed assets (of constant productivity and scrapped without cost or benefit) n = 3 years.