Key points of the solow model of economic growth dummies. This seems to suggest the possibility of selfsustaining growth through capital deepening. However, the marginal product of additional units of capital may decline there are diminishing returns and thus an economy moves back to a longterm growth path, with real gdp growing. Let k be the capital,2 l the labor, and q the production output of. Human capital and solow model university of minnesota. The bulk of this paper is devoted to a model of longrun growth which accepts all the harroddomar assumptions except that of fixed proportions. Assumptions savings and investment decisions are exogenous no individual optimization. Solowswan model named after robert bob solow and trevor swan, or simply the solow model before solow growth model, the most common approach to economic. Technically growth just refers to the periodoverperiod percentage change in a variable. Bob solow has carried out some of the most important work in macroeconomics by creating the solow model of economic growth. Economic growth and the solow model eric sims university of notre dame fall 2012 1 introduction we begin the course with a discussion of economic growth.
The solow model karl whelan school of economics, ucd spring 2020 karl whelan ucd the solow model spring 2020 1 30. The solow growth model first, consider the consumers in the economy. Factor accumulation and technological growth are also exogenous. The more that people in an economy save of their income, the greater the amount. According to solow growth model it allows us a dynamic view of how savings affects the economy over time.
The basis of growth in his model was, on the one hand, the sub. Robert lucas econ 3307 baylor university malthus and solow fall 20 10 35. The neoclassical growth theory was developed in the late 1950s and 1960s of the twentieth century as a result of intensive research in the field of growth economics. Harroddomar model emphasized potential dysfunctional aspects of growth. Solow postulates a continuous production function linking output to the inputs of capital and labour which are. Because returns to scale are constant, national income and product y, saving and investment s i, and consumption c all grow at. 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. At the center of the solow growth model is the neoclassical aggregate. Midterm exam 1answers human resources and economic. Following mankiwromerweil 1992 and islam 1995, i estimate. Master in economic development and growth empirical estimation of the solow growth model.
Capital accumulation, productivity, and economic growth douglas holtzeakin abstract national, state, and local policy makers have increasingly focused their at tention on policies toward economic growth, especially efforts to raise the rate of investment. Mapping the model to data introduction solow growth model and the data use solow model or extensions to interpret both economic growth over time and crosscountry output di. Solow growth model solow growth model solow growth model develop a simple framework for the proximate causes and the mechanics of economic growth and crosscountry income di. Were the magnitudes of the key parameters the savings ratio, the capitaloutput ratio, the rate of increase of the. Solows neoclassical growth model economic growth economics. Economic growth and welfare \the consequences for human welfare involved in questions of economic growth are simply staggering. As joan robinson has put it, the rate of technical progress and the rate of increase of the labour force govern the rate of growth of output of an economy that can be permanently maintained at a constant rate of profit. The solow growth model article pdf available in the journal of economic education 384. What are the determinants of longrun economic growth. Wilson mixon jr and others published the solow growth. A contribution to the theory of economic growth, qje dynamic general equilibrium model the model is only as good as its assumptions economic environment a set of assumptions a single composite good. The solow growth model, developed by nobel prizewinning economist robert solow, was the first neoclassical growth model and was built upon the keynesian harroddomar model.
The solow growth model, originally developed in the 1950s, is one of the most widely applied theories in modern economics. The rst model that we will look at in this class, a model of economic growth originally developed by mits robert solow in the 1950s, is a good example of this general approach. The theory states that economic growth is the result of three factors. R is homogeneous of degree m in x 2 r and y 2 r if and only if g. So, countries can also have different relative incomes if. Meade are the two well known contributors to the neoclassical theory of. Economic growth and convergence across the oic countries. Solow model regarding the fact it was a single factor model where the sole growth factor was capital accumulation. The model is also due to robert solow, whose work on growth accounting we discussed in the last lecture, and was rst presented in his 1956 paper \a contribution to the theory of economic growth. The solow model recall that economic growth can come from capital deepening or from improvements in total factor productivity.
We are going to use this model extensively to understand economic growth over time and in the crosssection of countries. Theories of economic growth growth is a complicated process, but the main theories of economic growth are conceptually simple. The solow growth model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of. In a solow model, this cannot sustain per capita growth because. The solow growth model is a dynamic model that allows us to see how our endogenous variables capital per worker and output per worker are affected by the exogenous variable savings. A contribution to the theory of economic growth authors. A glance at solows growth theory munich personal repec archive. Population growth and technological progress gdp y t fk. Solow swan model of economic growth 1956 what drives an increase in gdp per capita in a long run. Output is regarded net output after making allowance for the depreciation. Solows purpose in developing the model was to deliberately ignore some important aspects ofmacroeconomics, suchasshortrun.
Simplified representation of the solow growth model. Solow analyzes how higher saving and investment affects longrun economic growth. Production function, with physical capital k, labor l and knowledge or technology a. Solow s model is sometimes called the neoclassical growth model because it built on. It is very easy to get growth in an aggregate in any model, even in a solow model, because of population growth. Exposition o al is the amount of effective labor or the amount of labor measured in efficiency units this is not important for itself, but is a useful analytical magnitude. A contribution to the theory of economic growth robert m. The first model that we will look at in this class, a model of economic growth originally developed by mits robert solow in the 1950s, is a good example of this. The solow model s assumptions the solow model assumes that output is produced using a. At the same time, the estimates indicate a substantial role for human capital as well in raising productivity.
Exposition model grew out of work by robert solow and, independently, trevor swan in 1956. Also, even in the context of a neoclassical growth model, changes in the rate of investment have a sustained impact on the pace of economic growth. Solow s theoretical model of growth had an enormous impact on economic analysis. Then, in 1956, american economist robert solow published a paper titled a contribution to the theory of economic growth. Solow growth model overview, assumptions, and how to solve. The solowswan model is an economic model of longrun economic growth set within the framework of neoclassical economics.
I keep referencing the solow growth model, which defines the core driver of economic growth as technological innovation. The solow analysis makes extensive use of the production function and a simple assumption about saving. In the solow model with exogenous population growth, per capita income grows at the rate of population growth. The solow model is the basis for the modern theory of economic growth. The american economist robert solow, who won a noble prize in economics and the british economist, j.
Macroeconomics solow growth model longrun steady state in the long run, there is steadystate economic growth. Technically growth just refers to the periodoverperiod percentage change in. Solowswan model of economic growth1956 what drives an increase in gdp per capita in a long run. Daron acemoglu mit economic growth lecture 4 november 8, 2011. Describes how natural output y, assuming full efficiency evolves in an economy with a constant saving rate. Develop a simple framework for the proximate causes and the mechanics of economic growth and crosscountry income di. First, the article analyzes the pathbreaking model of growth contained in solows article a contribution to the theory of economic growth. The solow swan model of economic growth postulates a continuous production function linking output to the inputs of capital and labour which leads to the steady state equilibrium of the economy. In fact, solow growth model marks a brake through in the history of economic growth. Introduction and the solow model mit opencourseware. Growth e ects in item 2 related constancy of physical and human capitalcombined.
Lecture 4 modern growth theories rutgers university. Solow abandoned the standard keynesian assumption of a fixed ratio between production factors and introduced a ratio variable. The solow swan model is an economic model of longrun economic growth set within the framework of neoclassical economics. The model solow 1956 criticizes the keynesian harroddomar long term growth model3 for the crucial. But we are also going to use it to standard understanding economic uctuations and the economic impact of various policies.
Given assumptions about population growth, saving, technology, he works out what happens as time passes. This research examines the relevancy of solow growth model in 20 oecd countries over the period 19712011. The solow model believes that a sustained rise in capital investment increases the growth rate only temporarily. As labor grows at rate n, necessarily k grows at rate n. At its core is a neoclassical aggregate production function, often specified to. For interpretation purposes, we will be more concerned with the. In fact, the longrun growth model was introduced for the first time in that paper. Production function, with physical capital k, labor l. According to acemoglou 2009, this model shaped the way we approach both economic growth and the entire field of macroeconomics. They found support for the solow model s predictions by the inclusion of saving and population growth rate variables in the regression. To explain the economic growth of america and europe from the middle of the nineteenth century through the twentieth century, growth economists added another factor in the production function, namely, technology. What are the basic points about the solow economic growth model. Solow builds his model of economic growth as an alternative to the harroddomar line of thought without its crucial assumption of fixed proportions in production. Understanding the solow economic growth model tutor2u.
Given everything discussed about the solow model and ideas and convergence, have students evaluate the following quote from former usaid director, raj shah. Solow was awarded a nobel prize in 1987 for his contribution to the theory of economic growth. The characteristic and powerful conclusion of the harroddomar line of thought is that even for the long run the economic system is at best balanced on a knifeedge of equilibrium growth. Apr 21, 2019 robert solow and trevor swan first introduced the neoclassical growth theory in 1956. Macroeconomics solow growth model solow growth model solow sets up a mathematical model of longrun economic growth. According to the solow growth model, in contrast, higher saving and investment has no effect on the rate of growth in the long run. Introduction of human capital helps to explain why rates of return to physical capital may not be as high in poor countries as the simple solow model predicts. Solow, a contribution to the theory of economic growth, the quarterly journal of economics, volume 70, issue 1, february 1956. Solows model is sometimes called the neoclassical growth model because it built on the classical models used by economists before keynes.
At the center of the solow growth model is the neoclassical aggregate production function. The solow model is consistent with the stylized facts of economic growth. The solow swan model being an exogenous growth model is an extension to the harroddomar model. What do simple neoclassical assumptions imply about. The basic essence of this model provides an explanation of long term economic growth using the fundamentals of neoclassical theories like labor and productivity. Well add some dynamics here, as we analyze the economy in terms of the current and future periods. Financing growth and development in the transition economies. Swan, or simply the solow model before solow growth model, the most common approach to economic growth built on the harroddomar model.
Endogenous growth model and solows growth model differences. Once one starts to think about them, it is hard to think about anything else. Solows theoretical model of growth had an enormous impact on economic analysis. In this paper, professor solow examines how future economic growth and development is constrained if the natural resource base narrows over time. Solow, a contribution to the theory of economic growth. There are basically two categories of economic growth theoriesthose based on the traditional solow 1956 growth model and those based on the concept of endogenous growth. Contribution to the theory of economic growth the quarterly. The solow models assumptions the solow model assumes that output is produced using a. His benchmark model is still taught in universities throughout the world. It attempts to explain longrun economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress. Solow s purpose in developing the model was to deliberately ignore some important aspects ofmacroeconomics, suchasshortrun. Harrod vs solow model of economic growth vskills blog.
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