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In 1994, Nobel Prize-winning economist Paul Krugman wrote an article titled, The Myth of Asia's Miracle, in which he uses insights from the Solow model
In 1994, Nobel Prize-winning economist Paul Krugman wrote an article titled, The Myth of Asia's Miracle, in which he uses insights from the Solow model to explain the economic growth that was occurring in some Asian economies at the time.
(b)On the second page, Krugman writes, "Rapid Soviet economic growth was based entirely on one attribute: the willingness to save."Brieflydiscusses this statement in the context of the article and what we know about the change in income per capita after an increase in the savings rate.
Tbe Myth ofAsin's Miracle dent who pledged to \"get the country moving again\"a pledge that, to him and his closest advisers, meant accelerating America's eco- nomic growth to meet the Eastern challenge. The time, of course, was the early 19605. The dynamic young pres ident was John F. Kennedy. The technological feats that so alarmed the West were the launch of Sputnik and the early Soviet lead in space. And the rapidly growing Eastern economies were those of the Soviet Union and its satellite nations. While the growth of communist economies was the subject of innumerable alarmist books and polemical articles in the 19505, some economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most pop- ular assumptions. Communist growth rates were certainly impressive, but not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capi~ tal. Once those inputs were taken into account, the growth in output was unsurprisingor, to put it differently, the big surprise about Soviet growth was that when closely examined it posed no mystery. This economic analysis had two crucial implications. First, most of the speculation about the superiority of the communist system\"- including the popular View that Western economies could painlessly accelerate their own growth by borrowing some aspects of that systemwas off base. Rapid Soviet economic growth was based entirely on one attribute: the willingness to save, to sacrice current consumption for the sake of xture production. The communist example offered no hint of a free lunch. Second, the economic analysis of communist countries' growth implied some future limits to their industrial expansionin other words, implied that a naive projection of their past growth rates into the future was likely to greatly overstate their real prospects. Eco nomic growth that is based on expansion of inputs, rather than on growth in output per unit of input, is inevitably subject to diminish- ing returns. It was simply not possible for the Soviet economies to sustain the rates of growth of labor force participation, average edu- cation levels, and above all the physical capital stock that had preStep by Step Solution
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