Question

In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly affect the capital stock, but that casualties reduce the labor force. Assume the economy was in a steady state before the war, the saving rate is unchanged, and the rate of population growth after the war is the same as it was before.
a. What is the immediate impact of the war on total output and on output per person?

b. 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 it was before the war?

Answer 1

Answer:

a. The production function in the Solow growth model is Y = F(K, L), or expressed in terms of output  per worker, y = f(k). If a war reduces the labor force through casualties, then L falls but k = K/L  rises. The production function tells us that total output falls because there are fewer workers.  Output per worker increases, however, since each worker has more capital.

b. The reduction in the labor force means that the capital stock per worker is higher after the war.