Natural Capital and Allocation of Investment along a Sustainable Growth Path

To study natural resource and economic growth on sustainability, we present an extension of the neoclassical growth model with two new concepts: natural capital and allocation of investment. We consider that the value of the natural capital stock has declined during the production process and can be recovered from some regeneration process. The investment can be divided into two parts, which are used for the complementarity of manmade capital or natural capital. We also consider the allocation of investment affects the endogenous dynamics of ecosystems and growth path. According to our model, it is possible to achieve unbounded economic growth by keeping the natural system in steady state. Balanced growth, however, is only possible for special parameter values. Furthermore there exists the optimal allocation between the investment in the manmade capital and natural capital, which leads to the optimal economic growth speed with the sustainable development in the natural capital.