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THIS EXPLAIN THE CONTRIBUTION OF THE SOLOW MODEL TO THE THEORY OF ECONOMIC GROWTH GIVEN THE DIVERSITY OF DEVELOPING COUNTRIES
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QUESTION: EXPLAIN THE CONTRIBUTION OF THE SOLOW MODEL TO THE THEORY OF
ECONOMIC GROWTH GIVEN THE DIVERSITY OF DEVELOPING COUNTRIES?
COMPILED BY: Jeffery S. Fofanah (AKA Young
Solow)
1.INTRODUCTION
2.BACKGROUND OF THE SOLOW GROWTH MODEL
3. i. THE MODEL
ii. THE MODEL AND THE STEADY STATE
iii. THE CONTRIBUTIONS OF THE MODEL
**4. SHORT COMINGS OF THE MODEL
The Neo-classical model was an extension of the 1946 Harrod –
Dormar model that included a new term productivity growth.
Solow extended the Harrod- Dormar model by adding labour as a factor
of production and capital output ratios that are not fixed as they are in
the Harrod – Dormar model.
Solow sees the fixed proportions of production function as a “crucial
assumption” to the instability result in the Harrod- Dormar model.
Important contributions to the model; came from the work done by
Solow and Swan in 1956, who independently developed relatively
simple growth model.
Solow (1956) criticizes the Keynesian Harrod-Dormar long
term growth model for the crucial assumption that
production takes place under conditions of fixed
proportions.
Thus, Solow (1956) proposed a model of long-run growth
“which accepts all the Harrod-Dormar assumptions except
that of fixed proportion” in production.
It considers labor-capital substitution, that is, the change
in production technique as a response to changes in
relative prices of labor and capital.
CATCHING-UP GROWTH: Growth due to capital
accumulation
TING-EDGE GROWTH: It is a growth that is based on
eloping new ideas, innovations and entrepreneurship
Due to diminishing returns to
capital, countries with small
capital stocks should grow
rapidly. Eg China
Deriving the production function
Per worker production function
This shows how much output one worker produce
using k unit of capital
Government spending
investmen
t
outpu
t
Consumpti
on
sYS = I
Y- sY = C
i = Y - C
= Y – (1 – s) Y
= sY
National income identity is
i = sY
From the result
above
i =
s*f(k)
Capital
Outpu
t
Depreciati
on
CAPITAL
ACCUMULATION
CAPITAL
DEEPENING
Is increasing the amount of capital per
worker.
CAPITAL
WIDENING
Is the equipping of new workers with capital,
as the population grows.
Capital stock
Steady state
capital stock
Steady state
capital output
t happen to the model if savings increases?
Outp
ut
Capital stock
I = D
Steady state capital
stock
Steady state
capital output
Y
New Steady state
capital output
New
Investment
