Japan and Germany are two success stories of economic growth. Although today they are economic superpowers, in 1945 the economies of both countries were in shambles. World War II had destroyed much of their capital stocks. In the decades after the war, however, these two countries experienced some of the most rapid growth rates on record. Between 1948 and 1972, output per person grew at 8.2 percent per year in Japan and 5.7 percent per year in Germany, compared to only 2.2 percent per year in the United States. The “miracle’’ of rapid growth in Japan and Germany, is what the Solow model predicts for countries in which war has greatly reduced the capital stock.
Keeping in view the Solow growth model, consider an economy in steady state position. Suppose that a war destroys some of the capital stock. The level of output will fall immediately with the reduction in capital stock. How the output will grow and economy will reach its steady state position again despite the lower level of capital stock in this economy? Discuss in the context of Solow growth model.
Note: Write to the point. Avoid extra or irrelevant details.