Think about the model of human capital and growth introduced in this chapter. One useful feature of this model is that it simultaneously explains how rates of return to physical capital as well as the wage rate for unskilled labor might be low for developing countries (see Figure 4.1 for a summary). But there is a problem with this argument.

Figure 4.1

(a) Using a Cobb-Douglas production function with three inputs instead of two, show that such a model predicts that the rate of payment to human capital must be higher in developing countries. Explain why this is a problem by comparing the wages of administrators, doctors, lawyers, educators etc., across developed and developing countries.

(b) Adapt the Cobb-Douglas specification in part (a) to allow for differences in technology across developed and developing countries. Now it is possible to generate situations in which the return to every input is lower in developing countries. Which input is likely to have the lowest return (in a relative sense)?

(c) Provide some arguments for systematic technological differences across developed versus developing countries. If technology blueprints are known, why can they not be instantly imitated?

Transcribed Image Text:

Low Per Capita Income Low Physical Capital Relative to Unskilled Labor Low Human Capital Relative to Unskilled Labor Ambiguous Effect on Rate of Return to Physical Capital