The old Soviet Union devoted enormous resources exclusively to increasing its physical capital stock, and yet eventually the increase in the country's real GDP came to an end. Based on the discussion in the chapter, explain why this was inevitable.

Question

Gerald Knapp

Business

3 September, 08:19

The old Soviet Union devoted enormous resources exclusively to increasing its physical capital stock, and yet eventually the increase in the country's real GDP came to an end. Based on the discussion in the chapter, explain why this was inevitable.

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Hassan Branch · Answer 1

In the absence of technological innovation, massive capital investments yielded diminishing marginal returns.

Explanation:

The economy of the Soviet Union was a command economy where the government decided how resources would be allocated. The four factors of production are land, labor, capital and entrepreneurship. In a command economy, entrepreneurship is virtually nonexistent, so that leaves three factors: land, labor and capital.

The government allocated a lot of resources into increasing the capital factor, but capital factor will always yield diminishing marginal returns unless new technological innovations are developed. During many years, the Soviet Union was the technological leader of the world, but as time passed and with a complete absence of entrepreneurship, technological advances halted.