Answer to Question #124566 in Economics for Joseph Danso

Question

Why have economists identified a certain ratio of investment to GDP as a necessary condition for self-sustaining growth?

Answer 1

Investments are an important component in aggregate demand. Long run economic growth and development were based on the level of current investment rate, especially if we consider self-sustaining growth. So, the expected long run growth of the real income depends on the level of investment spending, that's why economists identify a certain ratio of investment to GDP as a necessary condition for self-sustaining growth.