Question

a. It is found that the real GDP per capita of developing countries grows faster than developed countries at the same period. Explain this phenomenon in the light of diminishing returns to capital.

b. In a closed economy, consumption is $80,000, taxes are $17,600, government purchases are $30,000 and national saving amounts to $20,000. Compute the level of GDP and private saving.

Answer 1

1) Developing countries are those that are less industrialized and have lower per capita levels of income; and on other hand the developed nations are highly industrialized with the higher per capita level of income. Developing nations have more potential to grow at a faster rate in real GDP per capita comparison to the developed nations due to the diminishing returns (especially to capital) are not as strong as in capital-rich nations. Moreover the developing nations may replicate the production technologies, methods, and institutions of developed nations

2) National saving = Y - C - G
20,000 = Y - 80,000 - 30,000
Y = 20,000 + 80,000 + 30,000 = 130,000
Private saving = Y - T - C = 130,000 - 17,600 - 80,000 = 32,400
Public saving = T - G = 17,600 - 30,000 = -12,400