Final answer:
China's economic growth is slowing due to diminishing returns to investment as capital per worker increases. High savings rates and investment in human capital fueled past growth, but higher-income economies now require technological innovations to maintain productivity growth.
Step-by-step explanation:
Why is China's Economic Growth Slowing Down:
China's economic growth is slowing down due to "diminishing returns to investment" in capital deepening. This economic principle suggests that as a country's capital per worker gets higher, additional investments yield smaller increases in productivity. Although low-income countries like China experienced rapid growth by saving substantially and investing in physical and human capital, they now face slowing productivity growth because their human and physical capital levels have significantly increased.
The theory of diminishing returns applies less to high-income countries due to ongoing technological innovations. These innovations often come from well-developed economic and political institutions that create a climate conducive to continuous technological advancement. Consequently, these technological breakthroughs can counterbalance the diminishing returns of investing in physical and human capital, demonstrating a shift upward on the production function curve. Previously, economies like China have benefited from high savings rates and policies focused on building human capital, such as improving education and acquiring technology. However, as they grow into higher-income economies, the initial rapid gains from heavy investments in human and physical capital become harder to sustain without new technologies or methods that improve the efficiency of capital usage.