Capital deepening

Is higher or lower α benefit more from capital deepening? I’m seeing conflicting answers for this.

I don’t understand the question.

Higher or lower what?

Alpha, which is the share of capital

(1-α) is the share of gdp paid to labour

Got it. (I put _α_s in for your _a_s to make it clearer.)

Capital deepening is the result of one (or both) of the following:

  • More capital
  • Less labor

You gain more from more capital when α is low (so 1 − α) is high.

You lose less from less labor when α is low.

Thank you !

I was also confused on this given that one of the asnwers in a Schweser mock states “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)” which seemed to conflict with the answer to a question in a different mock. I’m guessing what they are saying is that a developing country with a low α will benefit more than a developed country by moving to a high α.

Thoughts s2000?

agreed. i was confused about this as well.

i would like to say the following: - Cobb douglas equation characteristics are " deminishing marginal utility and constant returns to scale" given the diminishing marginal utility, the more the α the next level of out put will increase output almost as much as the previous one, the lower the α the next out put per capital will be lower than the previous one with the incremental output added. so higher α assumes higher benefit from capital deepining.

What!? Isn’t it a lower å means more benefit from capital deepening

Hi tau i know is that this model exhibits diminishing marginal productivity. A value of α close to 0 means diminishing marginal returns to capital are very significant and the extra output made possible by additional capital declines quickly as capital increases. In contrast, a value of α close to 1 means that the next unit of capital increases output almost as much as the previous unit of capital.