What Are The Basic Assumptions Of Capital Accumulation?

The neoclassical growth model describes an economy in which a single homogenous output is produced by two types of inputs, capital and labour. In contrast to the Malthusian analysis labour growth is determined by forces outside the economy and is unaffected by economic variables. In addition, we assume that the economy is competitive and always operates at full employment, so we can analyse the growth of potential output.

The major new ingredients in the neoclassical growth model are capital and technological change. For the moment, assume that technology remains constant and focus on the role of capital in the growth process. Capital consists of durable produced goods that are used to make other goods. Capital goods include structures like factories and houses, equipment like computers and machine tools, and inventories of finished goods and goods in process.
For convenience, we will assume that there is a single kind of capital good. We then measure the aggregate stock of capital as the total quantity of capital goods. In our real world calculations, we approximate the universal capital good as the total dollar value of capital goods.