Benefits from Capital Deepening

CFA Level II Economics
#1

One of the mocks says - Country A is a developing nation with the highest α (share of capital in GDP) among all the
countries. A high value of α indicates that the next unit of capital added will increase output
almost as much as the previous unit of capital. Developing nations with a high α are more likely
to benefit from capital deepening, which should result in an increase in productivity (at least in
the short term).

Don’t you benefit more when α is actually lower?

#2

According to the Cobb-Douglas production function:

Y = AK^{\alpha}L^{\beta}

The corresponding production growth formula is:

\frac{\Delta Y}{Y} ≈ \frac{\Delta A}{A} + \alpha\frac{\Delta K}{K} + \beta\frac{\Delta L}{L}

So, ceteris paribus, a higher \alpha means higher GDP growth.

1 Like
#3

muchas gracias magician

#4

Por nada.