Question

Why does productivity growth in high-income economies not slow down as it runs into diminishing returns from additional investments in physical capital and human capital? Does this show one area where the theory of diminishing returns fails to apply? Why or why not?

Short answer

In high-income countries productivity growth does not slow down by the use of advanced technology and innovation.

Step-by-step solution

Definition

Productivity growth is the increase in output or GDP of an economy. When the output per capita or GDP per capita of an economy increases that shows the growth and development of that country.

Explanation

When the additional investment is done in human capital or physical capital in an economy that refers to diminishing return due to which productivity growth starts decreasing but in high-income economies productivity growth does not tend to diminish or slow down as the technology used in high-income economies are very advanced and upgraded due to which it helps in increasing the productivity due to which productivity growth increases. The one area where the law of diminishing return is not applicable is an investment in human capital. Human capital brings technology development, innovation, creativity due to which output attained by human capital increases thus the productivity growth increases, and the law of diminishing return fails to apply.