Answer :
Final answer:
Once an economy has plenty of capital, adding more can lead to diminishing returns - this effect is known as 'capital deepening'. The impact of extra capital depends on factors such as the current state of the economy and how it is used. More capital might not spur growth if there's already ample capital in an economy.
Explanation:
Once workers in the economy have plenty of capital, adding more capital will generally lead to diminishing returns in efficacy. This is referred to as capital deepening, which implies an increase in physical or human capital per person. However, this principle greatly depends on how the additional capital is employed and the existing state of the economy.
For instance, if the new capital is used to enhance productivity by replacing outdated machines, then this could lead to increased output. Similarly, a firm’s or worker’s comparative advantage can be enhanced if they can specialize in what they are good at, for example, by participating in a trade that can lead to wage rises and greater employment.
Nevertheless, in an economy where there is already ample capital, further capital influx may not necessarily provoke a significant change. It might even lead to a trade deficit if not balanced with adequate exports. Additionally, an increase in the quantity of loans, for instance, does not always translate to economic growth. The effectiveness of added capital in such an economy depends on factors like how well it is utilized and the demand for capital in the market.
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