Question

Consider the economies of Blahnik and Gobbledigook, both of which produce gobs of goo using only tools and workers. Suppose that, during the course of 40 years, the level of physical capital per worker rises by 4 tools per worker in each economy, but the size of each labor force remains the same.

Complete the following tables by entering productivity (in terms of output per worker) for each economy in 2018 and 2058.

Year	Blahnik
	Physical Capital	Labor Force	Output	Productivity
	(Tools per worker)	(Workers)	(Gobs of goo)	(Gobs per worker)
2018	7	30	3,000
2058	11	30	3,600

Year	Gobbledigook
	Physical Capital	Labor Force	Output	Productivity
	(Tools per worker)	(Workers)	(Gobs of goo)	(Gobs per worker)
2018	4	30	2,400
2058	8	30	3,600

Initially, the number of tools per worker was higher in Blahnik than in Gobbledigook. From 2018 to 2058, capital per worker rises by 4 units in each country. The 4-unit change in capital per worker causes productivity in Blahnik to rise by a   amount than productivity in Gobbledigook. This illustrates the concept of , which makes it   for countries with low output to catch up to those with higher output.

Answer 1

Year	Blahnik
	Physical Capital	Labor Force	Output	Productivity
	(Tools per worker)	(Workers)	(Gobs of goo)	(Gobs per worker)
2018	7	30	3,000	100
2058	11	30	3,600	120

Year	Gobbledigook
	Physical Capital	Labor Force	Output	Productivity
	(Tools per worker)	(Workers)	(Gobs of goo)	(Gobs per worker)
2018	4	30	2,400	80
2058	8	30	3,600	120

In the above table the productivity per worker has been calculated by dividing output by number of labors in each country during the concerned time period.

The 4-unit change in capital per worker causes productivity in Blahnik to rise by a__smaller_____ amount than productivity in Gobbledigook. This illustrates the concept of____diminishing returns___ , which makes it___easier____ for countries with low output to catch up to those with higher output.

This example illustrates that disparity in the growth of productivity reflects the fact that capital in each country is subject to diminishing returns . In other words, an increase in output caused by an increase in capital is always less than the increase in output generated by previous increases in capital..