Can Physical Capital Move from Place to Place?

A first guess might be no. Although some capital goods, such as computers, can be transported, most capital goods are fixed in place. Factories are not easily moved from one place to another. New capital, however, can be located anywhere. When Toyota decides to build a new factory, it could put it in Japan, the United States, Italy, Vietnam, or Brazil. Even if existing capital stocks are not very mobile, investment is. In the long run, firms can decide to close operations in one country and open in another. To understand how much capital a country has, therefore, we must recognize that investment in one country may come from elsewhere in the world. Just as workers go in search of high wages, so the owners of capital seek to find the places where capital will have the highest return. We already know that the real wage is a measure of the marginal product of labor. Similarly, the real return on investment is the marginal product of capital (more precisely, the marginal product of capital adjusted for depreciation). Remember that the marginal product of capital is defined as the amount ofextra output generated by an extra unit of capital. The owners of capital look to put their capital in countries where its marginal product is high. Earlier, we saw two reasons why the marginal product of labor (and thus the real wage) might be higher in one country rather than another. There are likewise two reasons why the marginal product of capital might be higher in one country (A) rather than in another country (B). Holding all else the same, the marginal product of capital will be higher in country A if  The capital stock is smaller in country A than in country B.