Measurement
The degree of capital intensity is easy to measure in nominal terms. It is simply the ratio of the total money value of capital equipment to the total potential output. However, this measure need not be related to real economic activity because it can rise due to inflation. Then the question arises, how do we measure the "real" amount of capital goods? Do we use book value (historical price)? or replacement cost? or the price justified by the present discounted value of future profits? Or do we simply "deflate" the total current money value of capital equipment by the average price of capital goods?
Once this issue has been solved, the capital controversy rears its ugly head.
This controversy points out that measure of capital intensity is not independent of the distribution of income, so that changes in the ratio of profits to wages lead to changes in measured capital intensity.
Read more about this topic: Capital Intensity
Famous quotes containing the word measurement:
“That’s the great danger of sectarian opinions, they always accept the formulas of past events as useful for the measurement of future events and they never are, if you have high standards of accuracy.”
—John Dos Passos (1896–1970)