Despite the fact that the capital to output ratio has grown in most countries across the world, the marginal productivity of capital is still high relative to its replacement cost. Therefore, the observed capital to output ratio is still below its optimal level, given a rationale for further capital deepening.
The attached presentation shows the optimal capital level in the Solow growth model, showing that it is increasing in the share of capital in the production function and decreasing in the levels of capital depreciation and population growth. Using this theoretical optimal capital benchmark, we compare it with the observed level to determine the room that countries have to further invest in capital accumulation to increase production.
