The share of GDP devoted to investment was similar for Canad

The share of GDP devoted to investment was similar for Canada and South Africa over the period 1990-2010. However, South Africa had a 8 percent growth rate of average annua income, while Canada had only a 2.1 percent growth rate. Clearly explain this in writing and with a diagram.

Solution

The explanation is based on the concept of diminishing returns to capital. A country that has a lot of income, and so a lot of capital,gains less by adding more capital than does a country that currently has little capital. It is easy to envision how a poor country without much capital could increase its output considerably with even a little more capital.

There are several reasons for this but probably the main one is that developing countries are starting from a lower base income level than their developed country counterparts. Then there is also the presence of transfers (ODA etc) from developed to developing countries; higher population growth rates in developing countries; and the general shift of labour from agriculture to faster growing service and industrial industries that\'s taking place in developing countries. FDI is also growing faster into developing countries than into developed economies. General trade liberalisation is also helping developing countries even though there remain many barriers still in place.
South korea was still a developing country so a similar level of investment would lead to a relatively greater increases in average income per person would be my guess. Either that or the investment into south korea was invested better and so led to a larger growth per person but I think the first option is more like.