The productivity curve of the country Britania is given to be P. Currently the combination of physical capital per worker and real GDP per worker of Britania is at point A on the productivity curve. There are two other countries in the region, Zstan and Kryptan. These countries are similar to Britania in many aspects including technology, the level of education of the workforce and the supply of natural resources. However, Zstan has a higher savings rate than Britania while Kryptan has a lower savings rate.

Question

What will be an ideal response?

Answer 1

The key to asnwering this question correctly is to make the connection between higher saving and more spending on investment, which results in more physical capital per worker. To show a possible combination of physical capital per worker and real GDP per worker for Zstan use the double drop tool to select a point to the right of A on the curve and label it B. To show a possible combination of physical capital per worker and real GDP per worker for Kryptan use the double drop tool to select a point to the left of A on the curve and label it C. You might wish to re-review Chapter 9(24); Section: Why Growth Rates Differ