We have seen how investment ii causes the capital stock to rise. Let's consider how capital depreciation causes the capital stock to fall.

We assume that every year, a certain fraction δ\delta of the capital stock wears out. For example, if the capital stock consists in farm trucks which last on average 10 years, we can expect 10% of trucks to break down every year. The depreciation rate δ\delta would be equal to 0.1. The amount of capital that depreciates every year is a constant fraction δk\delta k of the capital stock.





At the current depreciation rate and capital per worker, 0.44 units of capital depreciate every year. We can see that the more capital there is in the economy, the more we lose capital through depreciation.

We now understand how capital increases through savings/investment and decreases through depreciation.

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