Consider two countries: A and B. Assume that both countries are exactl

Consider two countries: A and B. Assume that both countries are exactly similar until the year 2000. At the beginning of year 2000, both countries decide to change their strategy for economic growth.

Country A plans to encourage immigration and increase human capital in the economy to achieve sustained growth, while Country B decides to make large investments in research and development to achieve sustained growth. Which of the two countries is more likely to experience sustained growth and why?

ANSWER

Among the two countries, country B is more likely to experience sustained growth. This is because its approach to growth involves improving production technology, while country A’s approach to growth is involves increasing the total efficiency units of labor. Holding all other factors of production constant, if a country increases its workforce, every additional worker will increase GDP by less and less because of diminishing marginal product of total efficiency units of labor. On the other hand, investment in research and development is likely to increase the level of technology available with country B. Technology is a factor of production the growth of which is exponential. This is because new technology builds on existing technology. Since the growth in technology is exponential, it is the only factor of production, improvements in which need not necessarily run into diminishing marginal product. For this reason, country B which is investing in technology is more likely to experience sustained growth.