Impact of Total Factor Productivity on Economic Growth

Hard Economic Growth And Development Productivity

In the context of economic growth and productivity, the Solow Growth Model highlights the significance of various factors in achieving long-term economic stability. Assume a country is currently experiencing diminishing returns to capital but is also investing heavily in technology and human capital development.

If the country successfully increases its total factor productivity (TFP) through these investments, which outcome is most likely to occur in the long run?

The economy will experience rapid growth in per capita income, leading to long-term convergence with developed economies.

The long-term growth rate of the economy will stabilize at a level higher than before, but not necessarily converge with developed economies.

Diminishing returns will prevent any long-term growth, leading to a stagnant economy.

Hint

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