Solow Growth Model
The Solow Growth Model is also known as Exogenous Growth Model, Neo-classical Growth Model and Solow-Swan Growth Model. This concept is used to define what is called a model for long-run economic growth.
The model owes its important contributions to economists Robert Solow and T.W.Swan. They developed a relatively simple growth model which was fit with available U.S. economic growth with some success. Solow’s model emphasizes more on capital. Solow argued that new capital should be used instead of old capital. Solow believed that capital was produced from technology and technology improved overtime. So, Solow suggested that employing new capital would be much productive than the old capital.
This model was first developed by Sir Roy F. Harrod and Evsey Domar in 1946. Thus it was called Harrod-Domar Model. Solow’s Model is an extension of the above model. The extensions included
- Adding labor as factor of production.
- Requiring diminishing returns to labor and capital separately and constant returns to scale for both factors combined.
- Introducing a time-varying technology variable distinct from capital and labor.
Policy measures like tax cuts or investment subsidies can affect the steady level of output but not long-run growth rate. Growth is affected only in the short-run as the economy converges to the new steady output level. The rate of growth as the economy converges to the steady state is determined by the rate of capital accumulation. Capital accumulation can be determined by the savings rate (the proportion of output used to create more capital rather than being consumed) and the rate of capital depreciation.
In neoclassical models long-run growth rate is determined outside of the model. A common prediction of these models is that an economy will move toward steady growth rate, which in turn is dependent on the technological progress and the rate of labor force growth.
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