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, and also kills half of its population. We would expect That Country E's output per orke for some time. will grow faster than Country F's only That Country F's output per worker will grow faster than Country E's only for some time. That Country F's output (Y) will be higher than Country E's only for some time. That Country F's output (Y) will be higher than Country E's permanently.

Answer 1

1) As there is no population growth in both the countries and everything else is same. After earthquake country E ‘s capital stock is reduced to half and the population is also reduced to half.

We can say that the population of E will never rise and will always be half of country F. And as the technology used in both countries is also same and there are no technological progress, we can conclude that country E’s output will always be less than the output of country F.

So option D is the correct answer which says that the output of country F will be higher than the output of country E permanently.

2) In this case , as the population remains same but the capital stock decreases the output per worker will be reduced due to decrease in capital stock. As the savings rate are same for both the countries, the capital stock will rise at the same rate and so will the output. So here we can again say that the output of country E will be lower than the output of country F permanently.

So option D is the correct answer which says that the output of country F will be higher than the output of country E permanently.