Use production functions from the economic growth model to explain why the United States grew at a much faster rate than the Soviet Union in the latter half of the 20th century

Question

What will be an ideal response?

Answer 1

The Soviet Union's strategy to increase growth from the 1950s through the 1980s was to increase capital per hour worked. While this can raise growth, according to the economic growth model, eventually diminishing returns to capital set in. This means that as the Soviet Union added more and more factories, the extra factories added less and less to output.
From the diagram above, the Soviet Union took a path along Production function 1. They chose to increase capital per worker, and this moved them from A to B to C to D, where each time the increase in capital is the same, $10,000. It does increase output per worker. The most dramatic change is the movement from A to B, when real GDP per worker rises by $1,000. However each subsequent addition to capital brings about smaller increases in real GDP per worker. The movement from B to C increases real GDP per worker by $400; the movement from C to D increases real GDP per worker by $100.
Second, technological change is key to sustaining economic growth. The Soviet Union experienced very slow technological change. An extreme illustration of this is graphing the Soviet Union as moving along the same production function, Production function 1. The United States in comparison experienced more rapid technological change. This would be illustrated by the shift up to Production function 2. The United States moved on a path from B to E. The Soviet Union moved on a path from B to C to D. The improvement in technology increases real GDP per worker by $1000. The movement from B to D increases real GDP per worker by only $500.