Question

Two countries are IDENTICAL in every way except that one has a much higher​ capital-labor ratio than the other.

According to the Solow​ model, which​ country's total output will grow more​ quickly?
A. the country with the lower​ capital-labor ratio
B. the country with the higher​ capital-labor ratio
C. both countries will grow at the same rate
D. not enough information to answer the question

Answer 1

The country with the lower capital-labor ratio is expected to grow more quickly due to diminishing returns in the higher capital-labor ratio country and the potential for greater gains from new investments leading to economic convergence.

Step-by-step explanation:

In the Solow model, the country with a lower capital-labor ratio is often positioned to grow more quickly. This is due to the concept of diminishing returns in investments, where a country that already has a high capital-labor ratio will gain less from additional investments compared to a country with a lower ratio that has more room to grow and benefit from new capital infusion.

Another associated factor is economic convergence, wherein lower-income countries can catch up to higher-income countries as they experience larger gains from each unit of investment. The substantial growth in their GDP per capita often results from the effective combination of new skills and equipment with their labor force. Hence, the country with the lower capital-labor ratio would be expected to grow faster, benefiting from the larger impact of additional investments in physical and human capital.