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It is the idea that the economic growth is dependent on capital-output ratio (k, calculated as: Total output produced/total capital invested i.e. efficiency) and the saving ratio of the population.

The assumptions it makes are:

- Output is a function of capital stock

- The marginal product of capital is constant.

- Capital is necessary for output

- The product of the savings rate and output equals saving which equals investment

- The change in the capital stock equals investment minus the depreciation of the capital stock

It states that

Rate of growth of GDP = Savings ratio/ Capital output ratio.

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