Question

Really need help! Did not understand the questions!

Country X and Country Y have identical population, institutions and technology but country X has more physical capital. Which country will have a higher level of output and which will have a higher rate of growth?

Two countries, country A and country B are identical in every meaningful way. Then there is a massive earthquake in country B that destroys much of the capital.

a. What will be the immediate effect on the level of output in country B according to our model?

b. What will be the effect on the growth rate of country B shortly after the earthquake according to our model?

c. What will happen to the levels of output and rates of growth of these two countries over time? (This question can be answered in one word. A couple sentences is fine but don’t write a novel!)

Answer 1

When there is large physical capital in a country it means that country is having more man made goods which will help in production process. Hence country A is having more physical capital which means it has more man made goods to assist in production process. Thus country A will have high level of output and higher growth rate.

a) Country B output will fall due to earth quake because the production will stop for few days as people have to again settle and get get back to normal life.

b) Country B growth rate will fall as the production in the country is less it will lead to decrease in consumption of goods and services as there will be no goods in market. Thus economy growth rate will fall.

C) Over time period Country A growth rate will be get stabilize as it reaches the peak level of growth and output as it is already having higher level of output and growth rate.

Country B will have more scope to increase it output level and also to increase its growth rate as it will try to increase its physical capital after Earthquake.