Answer to Question #192668 in Macroeconomics for Tina

Question

 Suppose there are two contrasting impacts of a massive war, where a large number of countries were involved (e.g. World War II), on two large countries (Ping and Pong) in the world. Ping suffered a massive destruction of its capital stock relative to its population, while Pong suffered a huge loss of its population relative to its capital stock. That is, capital labour ratio suddenly fell in Ping and rose in Pong. For simplicity that all other things remained same. Assuming that both the country were in steady-state before the war, show the impact of the war on these two countries using a Solow diagram (i.e., capital labour ratio on the horizontal axis and output and savings on the vertical axis). Clearly draw and write your answer

Answer 1

By assumption, each economy's steady state remains unchanged since production function and the saving rate is the same. In Ping, the capital labor ratio rises over time. In pong, the capital/labor ratio falls over time. This means that, wages rise over time in ping while they fall over time in Pong.