Introduction to Unit 15 - Applications of the Solow Growth Model

A quick review of some important points about the economic growth model (Solow model):

• The model is used to describe the attributes of supply side economic growth that has been previously shown in this course as an expansion of a country's production possibilities frontier or its aggregate supply curve.

• The annual supply side growth rate of an economy is determined by its labor force growth rate and increases in worker productivity. Gains in worker productivity result from increases in the capital/labor ratio, and as a result of improvements in technology.

• Savings is critical. Savings must be adequate enough to cover the replacement of depreciated capital and to equip new workers with their share of capital. If savings falls below this level then the capital/labor ratio falls and worker productivity will suffer as a result, leading to a decline in output-per-worker and living standards. On the other hand growth receives a boost from high savings rates as the capital/labor ratio increases. In this case annual economic growth is enhanced by the added gains in worker productivity caused by the rise in the capital/labor ratio.

• For an economy that is considered to be developed, such as the United States, annual supply side growth has reached what is known as the steady state. Steady state economic growth assumes that the capital/labor ratio remains fairly constant and growth results from better capital leading to increases in worker productivity and increases in the labor force.

• In contrast are the rapidly growing less developed countries that have are characterized by high savings that funds significant increases in the capital stock, and a rising capital/labor ratio. Growth rates are boosted by the additional gains to worker productivity realized as the capital/labor ratio increases.

In this section we will take a look at the following circumstances:

• Why are some less-developed countries (LDCs) growing rapidly (the Asian Tigers, for example) and others contracting over time?
  
• We will discuss the convergence hypothesis, which theorizes that rapidly developing LDCs will eventually catch-up in living standards to the level enjoyed in the United States, Japan, and many of the nations of Western Europe.
  
• An analysis can be made of the role of technology in promoting improved economic growth rates and other public policy issues.
  
• We will consider how changes in population growth rates and savings rates impact the rate of economic growth and potential improvements in living standards.
  
• Recognize that for economies with low or negative economic growth, special attention must be paid to economic and social circumstances to encourage improved economic expansion.
  
• Look at the positive contribution of education in LDCs, especially when the education of females is promoted.

Outline

LINK TO MAIN SECTION OF UNIT 15 - APPLICATIONS OF THE SOLOW GROWTH MODEL

Copyright © 1999, Jay Kaplan
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Last updated April, 1999