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a. Trade Deficits: Capital Deepening or Consumption? Suppose a country that had balanced trade began to run a trade deficit. At the same time, consumption as a share of GDP increased but the investment share did not. Do you think there was an increase in capital deepening?
b. Diminishing Returns to Capital and Real Wages. Explain why this statement is wrong: “Since capital is subject to diminishing returns, an increase in the supply of capital will reduce real wages.”
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