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

Question

Quizplus · Accepted Answer

Since there are diminishing returns to capital, the country that starts with less capital per worker will experience a higher growth rate when the saving rate increases. This is because the additional capital will have a greater impact on the production and growth of the economy in the country with less capital per worker. Therefore, the country that started with less capital per worker will grow faster.

Suppose That There Are Diminishing Returns to Capital