Rise in per capita output gap = $135 (= 3% x $5 000 - 3% x $500).

Demographic transition view: Expanded output and income in developing countries will result in lower birthrates and slower growth of population. As incomes of primary family members expand they begin to see the marginal cost of a larger family exceeding the marginal benefit. The policy emphasis should therefore be on economic growth; population growth will stabilize. Traditional view: Developing nations should reduce population growth as a first priority. Slow population growth enables the growth of per capita income.

Capital earns a higher return where it is scarce other things equal. But when comparing investment opportunities between IACs and DVCs other things are not equal. Advanced factories filled with specialized equipment require a productive work force. IACs have an abundance of educated experienced workers; these workers are scarce in DVCs. Also IACs have extensive public infrastructures which increase the returns on private capital. Example: a network of highways makes it more profitable to produce goods which need to be widely transported. Finally investment returns must be adjusted for risk. IACs have stable governments and "law and order " reducing the risk of capital being "nationalized" or pilfered by organized crime.

To describe countries such as Japan and South Korea we would need to change labels on three boxes leading to a change in the "results" boxes. "Rapid" population growth would change to "low" rate of population growth; "low" level of saving would change to "high" level of saving; "low" levels of investment in physical and human capital would change to "high" levels of investment in physical and human capital. These three changes would result in higher productivity and higher per capita income which would produce a rising level of demand. Other factors: stable national government; homogeneous population; extensive investment in infrastructure; "will to develop"; strong private
incentives.