larger population implies more demand for goods and services, and thus
greater investment demand by firms. A larger population, even with an
unchanged level of income per person, leads to more income and greater
saving by households. With both the demand and the supply curves for
financial capital shifting to the right because of population growth, there
will be ongoing growth in the flow of investment and an ever-rising
capital stock; the effect on the interest rate will depend on the relative
size of the demand and supply shifts.
Technological change also affects both sides of the capital market.
Improvements in technology that increase capital’s MRP lead firms to
increase their investment demand. As we have said several times already
in this book, technological change also lies at the heart of increasing
productivity and growing per capita income. As income grows, so too
does the supply of saving. Thus, through its effect on income,
technological improvements that stimulate investment demand also lead
to an increase in the supply of financial capital. With both the demand
and the supply curves shifting to the right because of technological
improvements, there will be growth in the flow of investment and an
ever-rising capital stock; the effect on the interest rate will again depend
on the relative size of the demand and supply shifts.
Ongoing technological improvement and population growth, by increasing both the demand
for and the supply of financial capital, explain a rising capital stock with no clear trend in the
interest rate.