Question

There is a natural limit to economic growth from capital deepening due to:

a) Technological progress
b) Diminishing returns to capital
c) Increased labor force
d) Government regulations

Answer 1

Capital deepening leads to diminishing returns, but improvements in technology can help bypass this limitation and prevent economic growth from slowing down.

Step-by-step explanation:

Capital deepening, by definition, should lead to diminished returns because you're investing more and more but using the same methods of production, leading to the marginal productivity declining. This is shown on a production function as a movement along the curve. Improvements in technology should not lead to diminished returns because you are finding new and more efficient ways of using the same amount of capital. This can be illustrated as a shift upward of the production function curve.

Developing new technology can provide a way for an economy to sidestep the diminishing marginal returns of capital deepening. Figure 7.7 shows how. The figure's horizontal axis measures the amount of capital deepening, which on this figure is an overall measure that includes deepening of both physical and human capital. The amount of human and physical capital per worker increases as you move from left to right, from C₁ to C₂ to C3. The diagram's vertical axis measures per capita output.

With improvements in technology, there is no longer any reason that economic growth must necessarily slow down.