Question

Shortly before the fall of the Soviet Union, the economist Gur Ofer of Hebrew University of Jerusalem, wrote this: "Themost outstanding characteristic of Soviet growth strategy is its consistent poficy of very high rates of investment, leadingto a rapid growth rate of [the] capital stock." Explain why this turned out to be a very poor growth strategy.

Answer 1

Remainder part of the question:

This turned out to be a very poor growth strategy because

A. the capital stock was increasing less rapidly than technology.

B. the amount of labor per unit of capital was increasing.

C. there were diminishing returns to capital.

D. the amount of capital per hour worked was decreasing

Answer:

Option C There were diminishing returns to capital.

Explanation:

The reason is that the investment gave diminishing returns which didn't covered its cost of capital (the cost that we pay to finance providers). This diminishing returns limited the investment in the forthcoming period and as result we see the fall of Soviet Union. So this option provides a better insight to the poor growth strategy. The investment must be in projects that generates greater value to the organization.