Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person than the other. Suppose that the saving rate in both countries increases from 5 percent to 6 percent. Which of the following would we expect over the next ten years?
A)The growth rate will not change in either country.
B)The country with less capital will grow faster.
C)The country with more capital will grow faster.
D)Both countries will grow at the same rate.

Question

Quizplus · Accepted Answer

Since there are diminishing returns to capital, an increase in savings rate will lead to a larger increase in real GDP per capita for the country with less capital (i.e. the country with more room for growth). Therefore, we would expect the country with less capital to grow faster than the country with more capital over the next ten years.

Suppose That There Are Diminishing Returns to Capital