Reference no: EM131523988

Solow Growth Model and World War II Recovery: As you can probably imagine, World War II destroyed a significant part of the capital stock in Europe and Japan (factories, buildings, roads, ships, etc.). Yet by the late 1960s, GDP per worker in West Germany, Japan, and France was very close to GDP per worker in the U.S. (where very little of the capital stock was destroyed during the war).

a) Assume that savings rates in the U.S. and these other countries were equal during this period, and assume that technology in the U.S. and these other advanced European and Japanese economies was similar, so that each of these countries had the same production function. Assume that the U.S. and these other countries all started out at steady state before the war began. Draw a Solow Growth Model diagram for investment and break-even investment for these countries. At the end of World War II, where would the U.S. be in the diagram? Where would West Germany, Japan, and France be (assume these three countries are all at the same point in your diagram)? (Also assume that the percentage decline in the capital stock was greater than the percentage decline in the number of workers in each of these countries due to war casualties, which seems to be the case. You can ignore technology growth for this question.)

b) Using the diagram from part a) as a guide, explain why GDP per worker grew more quickly in West Germany, France, and Japan relative to the U.S. after the war ended. c) If savings rates and technology in all these countries are equal, what does the Solow growth model predict about GDP per worker in each of these countries in the long run? (Again, you can ignore technology growth.)