Economic restoration process after natural disasters under mutual relationships between industrial sectors

Abstract

In the supply chain among industrial sectors, reduction in the production capacity of a firm can lead to a decrease in the production of its customer firms. Such an effect is known as the ldquocascade effectrdquo and is one of the factors that expand total economic loss. This paper develops a two-sector economic growth model and investigates the economic restoration process that occurs after a natural disaster when the cascade effect is induced. In the model, the final good sector is dependent on the intermediate good sector, and the intermediate good market is closed in the economy. it is assumed that capital in the intermediate sector is decreased by a disaster and that production in the intermediate good sector is also decreased as a result. A numerical simulation demonstrates that although the final good sector may not be damaged physically by a disaster, production in the final good sector decreases as a result of the decrease in the production of intermediate goods. In addition, the overall household debt held by foreign countries increases because households supply recovery funds to the industrial sectors by borrowing. This causes household consumption to remain at a low level even after production recovers.