**Lucas paradox indicates that:**- ○ Labor productivity should increase in poor countries in low rates.- ○ The law of diminishing marginal productivity of labor indicates that an extra $1 of capital per worker will increase labor productivity more in a poor country where capital stock per worker is low. This implies that capital should flow from rich countries to the poor. The observation that capital doesn't flow from the rich to the poor countries, hence contradicting the above theory, is called the Lucas paradox.- ○ Poor countries have the lowest level of inflation.- ○ Poor countries grow fast but remain poor.

Answered: Lucas paradox indicates that Labor…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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**Lucas paradox indicates that:**

- ○ Labor productivity should increase in poor countries in low rates.

- ○ The law of diminishing marginal productivity of labor indicates that an extra $1 of capital per worker will increase labor productivity more in a poor country where capital stock per worker is low. This implies that capital should flow from rich countries to the poor.

The observation that capital doesn't flow from the rich to the poor countries, hence contradicting the above theory, is called the Lucas paradox.

- ○ Poor countries have the lowest level of inflation.

- ○ Poor countries grow fast but remain poor.

Expert Solution

Step 1

Theoretically, developed countries (or rich countries ) have more capital than developing countries (or poor countries), and therefore the marginal product of capital in developing countries (or poor countries) is higher than in developed countries (rich countries).

So, capital should flow from developed countries (or rich countries) to developing countries (or poor countries)

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