In: Economics
Principles of Macroeconomics
Consider two economies (US and CAN) that begin in steady state. The two countries are identical. The production function is:
? = ?? + ?
Suppose the following parameter values:
? = 1, ? = 0.1, ? = 0.2, ? = 1000
Then, a strong earthquake destroys 90% the steady state physical capital in CAN and 10% the steady state physical capital in US.
Assume these new levels of steady state physical capital become the starting levels of capital for each economy at period 0: ?0.
Find the growth rate of output for each economy between the periods 0 and 1. Do you observe the catch-up effect (Mankiw, Chapter 12) in this case? Explain in terms of the level of output and its corresponding growth rate.