Question

During the period of 1950-73 Western Europe had a great economic growth performance as its average GDP growth reached 4.8% but Japan had ever a much greater performance with a 9.3% GDP average growth in the same period. How this huge difference may be explained? Your arguments must be based on growth theory summarized by the production function.

Answer 1

We know the Cobb Douglas production function gives an empirical relationship between output growth and factors such as physical capital, technology and labor. In the era of 1950-73 rapid industrialization took place across the globe with disruptive technologies on the use. So the physical capital increased by a significant amount and to supplement this more workers were hired as well. Thus constant economies of scale is observed since both the increment in capital and labor increases the GDP in proportion. The bottomline between understanding the difference between the performance of western Europe and Japan is that the latter had a better capital growth and labor growth together when compared to western Europe. Apart from this robust transformation in agriculture, mechanization of small scale industries, land reforms, educational reforms and a stern establishment of a consumer economy set up the canvas for higher growth rates by increased productivity and skill set, which may not be executed well in western Europe as it was done in Japan. All these factors together increase the production of a country.

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