Question

In the discussion of German and Japanese postwar growth, the text describes what happens when part of the capital stock is destroyed in a war. By contrast, suppose that a war does not directly affect the capital stock, but that casualties reduce the labor force. Assume the economy was in a steady state before the war, the saving rate is unchanged, and the rate of population growth after the war returns to normal.

What is the immediate impact of the war on total output and on output per person?

Answer 1

The total output would fall because output depends on the use of the factors of production: labor and capital, and if many people die after the war, labor will shrink, meaning that total output will shrink as well.

Howerver, output per person will grow because now less people will have more capital available to produce.