Notice this is a multiple answers question. Suppose there are two very similar countries (call
them E and F). Both countries have the same population and neither is experiencing population
growth (that is, N is identical and constant in both countries). Both countries depreciate capital at
the same rate, the both have the same savings rate, they both have the same technology, and there
is no technological progress.
Suppose that currently both countries are in steady state, when an earthquake destroys half of the
capital stock of Country E, but does not kill any of its population. We would expect
Answer could be more than one of the options.
A. That Country E\'s output per worker (Y/N) will grow faster than Country F\'s only for some
time.
B. That Country F\'s output per worker (Y/N) will grow faster than Country E\'s only for some
time.
C. That Country F\'s output (Y) will be higher than Country E\'s only for some time.
D. That Country F\'s output (Y) will be higher than Country E\'s permanently.
Solution
1) If other parameters are the same and because of earthqaue half of the capital stock and half of
the population is destroyed then it will not change output per worker.
However, economic output will decline permanently if there is growth of population. If country
E witness population growth then it could catch output of F in some time.
2) If only capital stock is reduced and other factors are still constant then equilibrium forces will
drive country E to pre-earthquake level so E\'s output will grow faster than F for some time.
As per Solow\'s model, reduction in capital stock will reduce E\'s output in comparison to F for
some time.
Equilibrium forces will again bring E\'s output to that of F..
Notice this is a multiple answers question. Suppose there are two ve.pdf
1. Notice this is a multiple answers question. Suppose there are two very similar countries (call
them E and F). Both countries have the same population and neither is experiencing population
growth (that is, N is identical and constant in both countries). Both countries depreciate capital at
the same rate, the both have the same savings rate, they both have the same technology, and there
is no technological progress.
Suppose that currently both countries are in steady state, when an earthquake destroys half of the
capital stock of Country E, but does not kill any of its population. We would expect
Answer could be more than one of the options.
A. That Country E's output per worker (Y/N) will grow faster than Country F's only for some
time.
B. That Country F's output per worker (Y/N) will grow faster than Country E's only for some
time.
C. That Country F's output (Y) will be higher than Country E's only for some time.
D. That Country F's output (Y) will be higher than Country E's permanently.
Solution
1) If other parameters are the same and because of earthqaue half of the capital stock and half of
the population is destroyed then it will not change output per worker.
However, economic output will decline permanently if there is growth of population. If country
E witness population growth then it could catch output of F in some time.
2) If only capital stock is reduced and other factors are still constant then equilibrium forces will
drive country E to pre-earthquake level so E's output will grow faster than F for some time.
As per Solow's model, reduction in capital stock will reduce E's output in comparison to F for
some time.
Equilibrium forces will again bring E's output to that of F.
