Question

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 That Country E's output per workerwill grow faster than Country F's only for some time That Country F's output per worker That Country F's output (Y) will be higher than Country E's only for some time. N ill grow faster than Country E's only for some time. That Country F's output (Y) will be higher than Country E's permanently.

Answer 1

Before explaining this answer, let us study the concept of the Solow Growth Model and have a brief study of its evolution :

The Solow Growth Model was named after Robert Solow, who introduced it in a 1956 paper published in the Quarterly Journal of Economics. The Solow Growth Model is not a truly modern macroeconomic model on account that it assumes a certain behavior on the part of consumers instead of deriving it from utility maximization. Despite this shortcoming, the Solow Growth Model is a useful model to study the purpose of gaining economic intuition on a number of issues.

Initially, there are N₀ people alive in the model world, We use N₁ to denote the number of people in the economy at date t. Typically, we assume that people have a utility function which they try to maximize subject to a budget constraint. In the Solow Growth Model, this has all been assumed away. This assumption is that people prefer more consumption to less and save a constant fraction s of their income.

For many purposes, it is more interesting and relevant to study the behavior of per capita variables. This is because of a change in per capita variable is more informative of a change is peoples' welfare. For example, we could have an increase in total output with no change in per capita output on account of population growth. Just looking at the increase in total output would not tell you if people are better off or worse off over time.

It is not difficult to transform the Solow Model into its per capita representation. We begin by defining y =  $\small \frac{Y}{N}$ These are the per capita output and capital. If an earthquake destroys some of the capital stock (yet miraculously does not kill anyone and lower the labor force ), the marginal product of capital rises, and hence the real rental price rises. Because labor is now relatively more abundant, it becomes less productive, hence the demand for labor by firm rises.

Disasters may create a misleading impression of being "good for the economy" if they cause capital - to - labor ratios to rise. The initial shock to the labor resource will cause the PPF to retreat. However, because land and capital still exist and are available to a smaller population, the productivity of individual workers may actually rise. Additionally because now there is a smaller population to support, the standard of living of the survivors on the island may actually rise.

However, the detrimental effects of disasters are easier to see when the capital - to - labor ratio falls. If the earthquake destroys half of the capital stock of country E but does not kill any of its population, in such a case country F's output per worker, $\small (\frac{Y}{N})$ will grow faster than country E's only for some time or alternatively country F's output will be higher than the country E's permanently or for sometime .

The shock to its capital (and land ) resources immediately and drastically shrinks the nation's ability to produce goods and services. While the people are ready and willing to work, they have none of the tools, machinery, and technology they used before the storm hit. One of the determinants of productivity is the availability of physical capital. With less capital available to the workers, their output will fall. Especially, if the economy was very capital dependant (industrialized or heavily dependant on transportation and communication infrastructure ), it will struggle to return to former levels of production until it can recover the physical capital on which its productivity depended.