When a low-income nation improves its institutions, so that growth results, one reason the growth may be more rapid than would result from a similar improvement in a developed nation that brings the same amount of added capital per worker to each nation, is that

Question

Quizplus · Accepted Answer

In developed nations, there are already high levels of capital per worker. Therefore, as more capital is added, there are diminishing returns to scale, meaning that each unit of added capital produces smaller increments to production. In low-income nations, there is less capital per worker, so the same amount of added capital can produce larger increments to production. This is known as the "catch-up effect."

When a Low-Income Nation Improves Its Institutions, So That Growth