Question

International data on the relationship between the amount of capital per worker and average labor productivity indicates strong positive relationship between the two variables for developing and less developed nations and a much weaker relationship between the two variables for richer nations. A possible explanation for this is:_________.

Answer 1

Answer: Diminishing returns to physical capital

Explanation: The relationship between the amount of capital per worker and average labor productivity, which shows positive correlation for developing and less developed countries and a weaker relationship for developed countries can best be explained by the law of diminishing returns which suggests that as a country continues to increase its human and physical capital, marginal gains to economic growth will begin to diminish.

Diminishing returns to physical capital can be explained as the decline or smaller increase in productivity observed for every successive increase in physical capital when human capital per worker and technological level is fixed.

Developed countries thus possess higher technological and economic development than less developed and developing countries, hence the observed correlation.