Solow Model Essay - 3120 Words

What are the main limitations of the Solow model? Discuss with reference to theory and evidence. The Solow Model, also known as the neoclassical growth model or exogenous growth model is a neoclassical attempt created in the mid twentieth century, to explain long run economic growth by examining productivity, technological progress, capital accumulation and population growth. This model was contributed to by the works of Robert Solow, in his essay ‘A Contribution to the Theory of Economic Growth’ and by Trevor Swan in his work, ‘Economic Growth and Capital Accumulation’, both published in 1956. The model is perceived to be an extension of the 1946 Harrod-Domar model, which Solow (1956) describes as a ‘model of long-run growth which†¦show more content†¦Also, technology is regarded to be exogenous and is not explained by the model. Both these assumptions have been used by many economists to critique the model and contribute to the limitations of the model elaborated on further in the essay. What is the Solow Model designed to show? The Solow Model is designed to show how the growth in the labour force, capital stock and advances in technology interact and how they affect a nations total output. The model is important for the analysis of economic growth in developing countries as it demonstrates the nature of an economy to be a key determinant of steady-state capital stock within a country. If the savings rate is high, the economy will have a large capital stock and thus high level of output and vice versa. Correspondingly changes in capital stock can lead to economic growth. The Solow model indicates that countries with high population growth (with no change in capital) will have lower levels of output per person. In the model therefore, population growth capital per worker and output per worker are constant. Correspondingly, the aim of the Solow Model becomes clear: it is to show that an economy will incline towards a long-run equilibrium K/L (k) ratio at which Y/L (y) is also in equilibrium, so that Y, K and L all grow at the same rate, that is n. Ultimately the model predicts long run equilibrium at the naturalShow MoreRelatedThe Solow Growth Model By Robert Solow1705 Words   |  7 PagesThe Solow growth model was created by Robert Solow and was introduced to show how factors of production and advances in technology effect the nation’s total output. The model is made up of two components being the production and investment functions. This essay will discuss the possible effects, aspects and traits that an increase in population will have on the steady-state of the Solow growth model. This analysis will be followed by the effects of population growth on the growth rates in the modelRead MoreThe Effect Of Population Growth On Solow Growth Model1532 Words   |  7 PagesThe effect of population growth on Solow Growth model I. Introduction In order to study the economic growth, many economists had established a large number of economic growth model. In 1948, Roy Forbes Harrod (an economist in UK) and Evsey David Domar (the economists in US) propounded a economic growth model together. It called Harrod-Domar Growth Model. But Some Western scholars believe Harrod-Domar Growth Model overly pessimistic. And it does not fit the fact of the development of capitalismRead MoreThe Solow Swan Model : An Economic Model Of Long Run Economic Growth980 Words   |  4 PagesAnalysis The Solow-Swan model is an economic model of long-run economic growth in neoclassical economics. The model was developed by Robert Solow and Trevor Swan, independent of each other in 1956. This model is sometimes referred to as simply the Solow model, or the Neoclassical Growth model. The model focuses on four variables: output or GDP, capital, labor, and â€Å"knowledge†. The textbook Solow-Swan model is set in continuous time where there is no international or government trade. The Solow-Swan modelRead MoreThe Effects Of Population Growth On The Steady State Of The Solow Growth Model1502 Words   |  7 Pagessteady-state of the Solow growth model INTRODUCTION As the creation of neo-classical economic growth model pioneer, Solow growth model creates a new breakthrough in terms of the theoretical model in the reality and plays an important role in study in long-run economic growth model. The main purpose of this paper is to discuss the effects of population growth on the steady-state and growth rates of the Solow growth model. The structure of this essay is as follows: Section I introduces the Solow growth modelRead MoreExplain How the Solow Growth Model Would Analyse the Effects of a Fall in the Household Saving Ratio.2346 Words   |  10 PagesPART 1 Explain how the Solow growth model would analyse the effects of a fall in the household saving ratio. In this essay, I will focus on two important aspects. The first is to give a brief historical outline of the Solow growth model. The second thread runs express how the outline on the Solow growth model might explain the effect of a fall in the household savings ratio.My essay will be guided by the diagram provided on which I have to make specific references and to think throughRead MoreThe Theory Of Economic Growth Model2281 Words   |  10 PagesMany model mechanisms have been used to study the worldwide growth and income differences across countries. A fundamental model that economist have used to study these issues is the Solow growth model. This essay concentrates on the analysis of this model. Firstly, the derivation of the model will be demonstrated including the needed assumptions. Then the impact of a change in the saving rate on output and on consumption will be illustrated using diagrams. The primary conclusion of the Solow modelRead MoreInstitutional Environment as a Determinant of Chinese Private Firm Export Behaviors899 Words   |  4 Pagesintroduce â₠¬Å"institutional environment† as a measure of the degree to which policies and institutes in one region differ from those in another region in china, where market are distorted across space and region[1]. We employ a modified heterogeneous firm model developed by Mayer and Melitz et al(2011)[12] to examine whether such institutional environment differences affect the firms’ export behavior. Employing data for china firm-level exports in 29 province for which measures of institutional environmentRead MoreThe Model Of Economic Growth1346 Words   |  6 PagesThe authors have studied the Solow Model of economic growth, which assumes the neoclassic production function of decreasing returns to capital. Solow proposed the model while considers the rate of saving and population growth as exogenous and demonstrated that the countries reach the steady state level of income per capita. However, the classical Solow model is not able to explain cross-country variation in the stand ard of living. The Solow model predicts the effect of saving and population growthRead MoreHuman Capital And Non Physical Capital1535 Words   |  7 Pagesdifferences in human capital reveal as cross-country differences in TFP, but it is still hotly debated for how much human capital can account. Mankiw, Romer and Weil (1992) emphasize the importance of investment in human capital and claim that the Solow growth model augmented to involve human capital can account for most of the variation in differences in output per capita. On the other hand, several recent works provide different conclusion, for example, Manuelli and Seshadri (2005) argue that most crossRead MoreEconomic Growth Theories and Models, A section of a Research Paper1524 Words   |  6 PagesLiterature review Classical Theory of Economic Growth Harrod Domar Growth Model The Neoclassical growth Model Empirical literature 2.1 Theoretical Literature The long history of ideas on economic growth started from the classical economists like Adam Smith, Robert Malthus, Ricardo and Marx. For more than three decades the Neoclassical and the Endogenous Growth theories were arguing and forwarding economic reasons on trend of economic growth through investment as a general and private investment