Solow Growth Model Essay

The Solow Growth Model was created by Robert Solow in 1956. He later went onto win the Noble Prize for it.

It’s a simple and basic model which focuses on physical capital per worker. It has managed to break down the economy growth into 3 different categories in terms of Capital, labor and technology. There are certain assumptions that are required for the model to work. The economy of the country has to be closed economy. There has to be technological and other factors of progress.

Basic growth theory.

Q = A.f (L, K, H)

Here,

Q represents GDP while L stands for Labor, K stands for Capital and H stands for Human capital.

As the assumption for the model to work requires technological progress, “A” stands for technological progress. If there’s an introduction of new technology or an improvement in the working of the technology or an increase in trade or commerce, “A” increases.

Sources Of Growth. q = A.F (k,h)

The model illustrates the need for technological or other influences for growth. For the convergence to happen, there needs to be certain upward movement that needs to take place. One of the reasons for the growth is the increase in investment. This brings in more

Steady State occurs when the investment covers depreciation. This puts capital per worker as constant. ∆k = 0

If capital per worker be too high as that would increase depreciation over investment.

If the capital per worker is low, investment would decrease depreciation.

So, in this case, both capital per worker and output per worker should be the same.

Capital Accumulation

The basic idea about capital accumulation is that-

- The investment makes the capital stock bigger.

- Depreciation makes it smaller.

So,

Change in Capital Stock = investment – depreciation ∆K = i - δk

Since, i = sF(k)

This becomes

∆k = sF(k)- Δk

How Model predicts that poor countries will eventually converge with rich