Question

Japan and Germany are two success stories of economic growth. Although today they are economic superpowers, in 1945 the economies of both countries were in shambles. World

War II had destroyed much of their capital stocks. In the decades after the war, however, these two countries experienced some of the most rapid growth rates on record. Between

1948 and 1972, output per person grew at 8.2 percent per year in Japan and 5.7 percent per year in Germany, compared to only 2.2 percent per year in the United States. Are the

postwar experiences of Japan and Germany so surprising from the standpoint of the Solow growth model? Consider an economy in steady state. Now suppose that a war

destroys some of the capital stock. (That is, suppose the capital stock drops from k* to k1).

Not surprisingly, the level of output falls immediately. But if the saving rate the fraction of output devoted to saving and investment is unchanged, the economy will then

experience a period of high growth. Output grows because, at the lower capital stock, more capital is added by investment than is removed by depreciation. This high growth

continues until the economy approaches its former steady state. Hence, although destroying part of the capital stock immediately reduces output, it is followed by higher than

normal growth. The “miracle’’ of rapid growth in Japan and Germany, as it is often described in the business press, is what the Solow model predicts for countries in which

war has greatly reduced the capital stock. In this discussion of German and Japanese postwar growth, capital stock is destroyed in a war. By contrast, suppose that a war does not affect

the capital stock, but that casualties reduce the labor force.

a) What is the immediate impact on total output and on output per person? Compare how the effect would be different from the above case.

b) Assuming that the savings rate is unchanged, and that the economy was in a steady state before the war, what happens subsequently to output per worker in the postwar

economy? Is the growth rate of output per worker after the war smaller or greater than normal?

no

rmal?

Answer 1

a. solow model took constant returns to scale and diminishing returns to capital per head.

hence if casualties happened then all of a sudden labour forces diminish and capital per head will increase. which will result in 1.higher output per head(why? each labour will have more capital to work on)  

2. total output will decline. As labour is missing than previous level hence total output will decline.

this effect is different than the previous results as now as the starting point the growth will be very lower(due to large capital per head). if the labour force increases and the capital remains the same then growth will increase with more output.

b. if the economy is in a steady-state before the war, the death of labour will make the per head capital more than the steady level and depreciation and population growth will outpace the per head output growth hence per head output decrease.

the rate of output per worker after the war will be smaller than normal.(due to large capital per worker and diminishing returns)

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