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    The Solow Growth Model

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    Bella Novitasari
    1. If the depreciation rate increases in the Solow growth model, the steady state per capita capital stock and output per capita will decrease. Higher depreciation means more resources must be spent replacing depreciated capital, lowering the long-run steady state. 2. Other variables that positively affect the steady state are the technological factor (A) and savings rate (s). Higher A or s increase the steady state levels of per capita capital and output. 3. While the Solow model can explain some cross-country income differences, it leaves out important factors like population growth, trade, institutions, human capital, technological progress, and innovation.

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    The Solow Growth Model

    Uploaded by

    Bella Novitasari
    84 views2 pages
    1. If the depreciation rate increases in the Solow growth model, the steady state per capita capital stock and output per capita will decrease. Higher depreciation means more resources must be spent replacing depreciated capital, lowering the long-run steady state. 2. Other variables that positively affect the steady state are the technological factor (A) and savings rate (s). Higher A or s increase the steady state levels of per capita capital and output. 3. While the Solow model can explain some cross-country income differences, it leaves out important factors like population growth, trade, institutions, human capital, technological progress, and innovation.

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    1. If the depreciation rate increases in the Solow growth model, the steady state per capita capital stock and output per capita will decrease. Higher depreciation means more resources must be spent replacing depreciated capital, lowering the long-run steady state. 2. Other variables that positively affect the steady state are the technological factor (A) and savings rate (s). Higher A or s increase the steady state levels of per capita capital and output. 3. While the Solow model can explain some cross-country income differences, it leaves out important factors like population growth, trade, institutions, human capital, technological progress, and innovation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    84 views2 pages

    The Solow Growth Model

    Uploaded by

    Bella Novitasari
    1. If the depreciation rate increases in the Solow growth model, the steady state per capita capital stock and output per capita will decrease. Higher depreciation means more resources must be spent replacing depreciated capital, lowering the long-run steady state. 2. Other variables that positively affect the steady state are the technological factor (A) and savings rate (s). Higher A or s increase the steady state levels of per capita capital and output. 3. While the Solow model can explain some cross-country income differences, it leaves out important factors like population growth, trade, institutions, human capital, technological progress, and innovation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    The Solow Growth Model & Long Term Economic Growth

    David Agrawal

    In lecture, we experimented with altering the Solow Growth model. The following practice problem demonstrates
    the influence of another experiment. I recommend working through the problem before consulting its solutions. I
    have prepared the following practice problem based on an examination question from Professor Olivier Morand at
    the University of Connecticut.

    Questions:
    In the Solow growth model, suppose that the depreciation rate increases.
    1. Determine the effects of this on the per capita capital stock, and on output per capita at the
    steady state. Explain the economic intuition behind your results.
    2. What other variable(s) affect the steady state in the Solow growth model?
    3. Does the Solow model of economic growth provide us with a good theory to explain the
    observed differences in GDP per capita and in rates of growth of GDP per capita between
    countries? What do you think is missing from this theory?

    Solutions:
    1. The depreciation rate increases and causes the curve d kt to pivot upward. Graphically, the
    Solow model is altered in the following manner:

    1/ 3 2/3
    The Steady State is defined as the level of K such that s A K * L = d K * . This is the
    intersection of the two curves on the graph.
    Clearly, as depreciation increases and shifts the curve upward, the steady state moves to the left
    and K* goes down.
    Therefore, the steady state per capita capital stock (k*) goes down. The steady state per capita
    output (y*) also goes down.
    Intuitively, if depreciation increases, the economy as a whole has to spend more resources
    replacing the depreciated capital, and therefore achieves a lower steady state in the long
    run.

    Agrawal Handout 3 Fall 05 100B 1


    2. In addition to depreciation which has a negative relationship to the steady state, the following
    variables affect the steady state in a positive relationship: A , s .
    Both of these variables shift the other curve in the model. An increase in A will cause k* and
    y* to increase. An increase in s will cause k* and y* to increase. See the following
    graph for the intuition.
    Note that a change in K does not shift the steady state’s outcome, but rather will only cause
    movement along the curve. Note that L will have consequences on the steady state, but I
    suggest you calculate the influence yourself to see its consequences (positive, negative, or
    uncertain) on y* and k*.

    Also note that depreciation is negatively related to y* and k*, while TFP and savings are
    positively related to y* and k*.

    3. Yes, it is a good theory to begin explaining these differences. An implication of the Solow
    growth model is the conditional convergence hypothesis, which states that “countries with
    similar A , s , d , L will converge to the same steady state, and the poorest among this group will
    grow faster than the richest.” That hypothesis is verified in some of the data.

    However, there are many things left unexplained including, but not limited to, the following:
    • The role of population growth, trade, and institutions
    • The role of the quality of the labor force (human capital)
    • The role of changes in TFP, technological progress
    • The role of innovation, ideas, research and development.

    Agrawal Handout 3 Fall 05 100B 2

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