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Develop a simple framework for the proximate causes and the mechanics of economic growth and cross-country income di¤erences. Solow-Swan model named after Robert (Bob) Solow and Trevor Swan, or simply the Solow model Before Solow growth model, the most common approach to economic growth built on the Harrod-Domar model.
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Domar model of economic grolvth. The characteristic and powerful conclusion of the Harrod-Domar line of thought is that even for the long run the economic system is at best balanced on a knife-edge of equilibrium growth. Were the magnitudes of the key parameters -the savings ratio, the capital-output ratio, the rate of increase of the
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Evaluating the Basic Solow Model † Why are some countries rich (have high per worker GDP) and others are poor (have low per worker GDP)? † Solow model: if all countries are in their steady states, then: 1. Rich countries have higher saving (investment) rates than poor coun-tries 2. Rich countries have lower population growth rates than poor ...
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Solow sets up a mathematical model of long-run economic growth. He assumes full employment of capital and labor. Given assumptions about population growth, saving, technology, he works out what happens as time passes. The Solow model is consistent with the stylized facts of economic growth.
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- The model
- Yt = AtF (Kt; Lt) = AtK L1 :
- St = It:
- Growth
- (1 + g)Kt=Yt = (1 )Kt=Yt + s:
- Executive summary
Solow’s model has four relatively simple components. The first is our friend the production function:
t Changes in output therefore come from changes in (total factor) productivity, cap-ital, and/or labor. Recall that one of the properties of this production function is diminishing returns to capital: each additional unit of capital leads to a smaller addition to output. This is the critical ingredient in what follows. The second com-ponent is a li...
Lurking behind the scenes here is the expenditure identity, Yt = Ct + It in this case. The third component is a description of saving behavior: people save a constant fraction s of their income, St = sYt; where the saving rate s is a (constant) number between zero and one. This is a little simplistic — you might expect saving to depend on the rate ...
If saving doesn’t generate growth, what does? We add growth in the labor force and (critically) growth in total factor productivity with two goals in mind. The first goal is to account for the growth rate of output, showing how it depends on the growth rates of our two inputs. The second is to show that the economy approaches what we call a balance...
− Solving for K=Y gives us the steady state capital-output ratio:
Solow’s model bases growth on saving and investment. Saving has a modest impact on steady state capital and output, and none on their growth rate. Fast-growing countries must save and invest more than slower-growing countries to have maintain the same capital-output ratio.
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economics.mit.edu · sites · default14.452 Economic Growth: Lecture 4, The Solow Growth Model and ...
Solow Growth Model and the Data. Use Solow model or extensions to interpret both economic growth over time and cross-country output di¤erences. Focus on proximate causes of economic growth. Growth Accounting I. Aggregate production function in its general form: Y (t) = F [K (t) , L (t) , A (t)] .
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Robert Solow received the 1987 Nobel Prize in economics for developing the leading model of economic growth. The model is based on the premise that cross-country differences in income per person are the result (primarily) of differences in national savings rates (savings finances increases in the capital stock).
