Question

in 2015 the capital-output ratio is higher in country C than in country D and both...

in 2015 the capital-output ratio is higher in country C than in country D and both countries are in steady state. Possible reasons include:

a) country C has higher saving rate than country D

b) country C has higher productivity growth than country D

c) country C has lower productivity growth than country D

d) both a) and b)

e) both a) and c)

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Answer #1

Solution:

Capital-output ratio (K/Y) indicates how much capital can result in output worth $1. In this sense, a higher capital-output ratio is an indication of lower productivity for the economy.

Furthermore, in steady state, K/Y = s/d, where s is savings rate and d is depreciation rate. So, a country with higher savings rate is expected to have higher capital output ratio, assuming the depreciation rate is nearly same in both.

Thus, most apt answer could be Country C has higher savings rate and lower productivity than country D. So, correct option is (e) both a) and c).

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