Exam 6: Long-Run Economic Growth: Sources and Policies

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The Soviet Union's strategy to increase growth from the 1950s through the 1980s was to increase capital per hour worked. While this can raise growth, according to the economic growth model, eventually diminishing returns to capital set in. This means that as the Soviet Union added more and more factories, the extra factories added less and less to output.
From the diagram, the Soviet Union took a path along production function 1. They chose to increase capital per worker, which moved them from A to B to C to D. Each time the increase in capital was the same: $10 000. It did increase output per worker. The most dramatic change was the movement from A to B, when real GDP per worker rose by $1 000. However, each subsequent addition to capital brought about smaller increases in real GDP per worker. The movement from B to C increased real GDP per worker by $400; the movement from C to D increased real GDP per worker by $100.
Secondly, technological change is the key to sustaining economic growth. The Soviet Union experienced very slow technological change. An extreme illustration of this is graphing the Soviet Union as moving along the same production function, production function 1. The US, in comparison, experienced more rapid technological change. This would be illustrated by the shift up to the production function 2. The US moved on a path from B to E. The Soviet Union moved on a path from B to C to D. The improvement in technology increased real GDP per worker by $1 000. The movement from B to D increased real GDP per worker by only $500.