Groos Domestic Product (GDP)?

Question

If the Groos Domestic Product (GDP) decline for several years, what effect would you expect it to have on the capital-to-labor ratio? How would this affect economic growth?

Answer 1

It would depend on the reason for the decline. War and natural disasters can cause decline because of destruction of capital stock as in Europe after WWII. When the decline is caused by the business cycle it is unemployment that causes the decline so the capital-to-labor ratio will increase. This would improve productivity, profit would increase and the economy would start to grow and the unemployed would get jobs. That is why it is called a cycle.