Suppose that there are diminishing returns to capital.Suppose also that two countries are the same except one has more capital per worker and so it has more real GDP per worker than the other.Finally,suppose that the saving rate in both countries increases from 4 percent to 7 percent.Over the next ten years we would expect that
A)the growth rate will not change in either country.
B)the country that started with less capital per worker will grow faster.
C)the country that started with more capital per worker will grow faster.
D)both countries will grow and at the same higher rate.

Question

Quizplus · Accepted Answer

Since there are diminishing returns to capital, the country with less capital per worker will experience a greater increase in real GDP per worker when the saving rate increases. This is because the extra capital will have a larger impact on productivity when there is less capital to begin with. Therefore, the country that started with less capital per worker will grow faster than the country that started with more capital per worker. Both countries will experience some growth due to the increase in saving rate, but the country with less initial capital per worker will experience a higher growth rate.

Suppose That There Are Diminishing Returns to Capital