Question

4) Consider Richland and Poorville. Richland has .1 factories per worker and Poorville has .01 factories per worker.

a. Where would a foreign investor likely receive a higher return on building a factory (assuming the same level of political stability, human capital, etc)? Why? [10pts]

b. Because Richland has many factories, building more is not a good source of economic growth. What could Richland do instead to encourage growth? [15 pts]

Answer 1

a) Richland has 10 workers for every factory and Poorville has 100 workers for every factory, which means the productivity of workers at Richland is much higher than that of Poorville. Hence a foreign investor would likely receive a higher return on building a factory in Richland than Poorville.

b) Richland could do the following to encourage growth:

1) Discourage more factory setting up in their country by imposing a higher tax rate.

2) Use that money to spend on Research and development

3) Encourage investments in modern and better Infrastructure, Healthcare and quality of life