Question

Both China and India have averaged around 7% GDP growth rates over the last 5 years while the US and Japan have averaged around 2%. The population growth rates for the US and China and Japan are all under 1% (.5% for China, .8% for the US, and −.1% for Japan) while India’s is 1.2% (also relatively modest). Discuss these facts in the context of a Solow-Swan growth model, clearly explaining your reasoning.

Answer 1

A Solow Swan growth model explains long run economic growth with focus on productivity/technological progress, capital accumulation and population growth as the primary determinants of it. The model states that in a long run, the economies would converge to a steady state equilibrium and a permanent growth is achievable only by technological progress. He also stated that the variations in population growth and savings would only have less effects in the long run. The above case states that the GDP growth of India and China have remained high in the previous 5 years whereas that of US and Japan have been low despite the fact that all the countries have had less population growth over the years. The following could be discussed based on this trend and the Solow Swan growth model

· The model states that population growth would only have less effects on the economic growth or the GDP growth of a nation.

· Studies based on the model has revealed that a better population base would have more effects than the population growth on the GDP of an economy

· Here, both India and China have better population base with China having almost 140 crore population base and India having 135 crore population. United States have a population base of about 32 crores and Japan has a base of almost 12.5 crores.

· Thus, even though the population growth rates are similar, the increase made in the population would be based on the population base and hence India and China would have more increase of population compared to USA and Japan.

· Increased population would result in better employment potential in the economy and increased demand which would force the economy to produce more

· As the production increases, the GDP also tends to increase and depending on the value of the domestic currency, the GDP growth would also improve

· The model states that with non-zero workforce growth, a new steady state would be reached with constant output per worker-hour required for a unit of output.

                                             The model also assumes that if the countries have same population growth rate, they will converge and at this conditional convergence, a poor country will grow faster. This assumption is applied in this case. Japan and America are developed nations compared to India and China. But as per the above assumption, the conditional convergence means that lesser developed countries would have better growth rate when the population growth rate is almost similar.