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  • Why Doesn't Capital Flow From Rich To Poor Countries?

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    John Reed
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    The document discusses why capital does not always flow from rich to poor countries according to economic theory. It points out that human capital, which is not included in simple capital models, could help explain the differences in marginal product of capital between nations. Specifically, the marginal product of capital is increasing in human capital levels. Therefore, the return on capital may be higher in rich countries with abundant human capital compared to poor countries with scarce capital and lower human capital, causing capital to flow in the opposite direction of income levels between nations.

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    The document discusses why capital does not always flow from rich to poor countries according to economic theory. It points out that human capital, which is not included in simple capital models, could help explain the differences in marginal product of capital between nations. Specifically, the marginal product of capital is increasing in human capital levels. Therefore, the return on capital may be higher in rich countries with abundant human capital compared to poor countries with scarce capital and lower human capital, causing capital to flow in the opposite direction of income levels between nations.

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    © All Rights Reserved
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    6 vues1 page

    Why Doesn't Capital Flow From Rich To Poor Countries?

    Transféré par

    John Reed
    The document discusses why capital does not always flow from rich to poor countries according to economic theory. It points out that human capital, which is not included in simple capital models, could help explain the differences in marginal product of capital between nations. Specifically, the marginal product of capital is increasing in human capital levels. Therefore, the return on capital may be higher in rich countries with abundant human capital compared to poor countries with scarce capital and lower human capital, causing capital to flow in the opposite direction of income levels between nations.

    Droits d'auteur :

    © All Rights Reserved
    Téléchargez comme PDF, TXT ou lisez en ligne sur Scribd
    Signaler comme contenu inapproprié
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    Why Doesn’t Capital Flow from Rich to Poor Countries?

    Human Capital: Our textbook points out that human capital is not included in the
    simple model of production but that it could be an important factor in explaining why
    the marginal product of capital differs among countries.

    1. Consider a Cobb-Douglas production function with three inputs:

    1 1 1
    Y = K 3 L3 H 3 , (1)
    where K is capital, L is labor, and H is human capital. What is the marginal
    product of capital (MPK) implied by this production function?

    2. Is MPK increasing in human capital or decreasing?

    3. Use this model to explain why capital may flow from poor to rich countries.

    4. Is the return to education higher or lower in countries with scarce capital?

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