Question

(a) State the central conclusion of the Solow model of economic growth. (b) In terms of the Solow growth model, discuss the convergence hypothesis. (c) List two ways to promote stronger economic growth. (d) Describe the growth slowdown that has been labelled “The Great Stagnation”.

Answer 1

Ans) Solow' s model of growth is based on the following assumptions:

1) A single composite commodity is produced.

2) Law of constant return to scale operates.

3) There are only two factors of production - Labour and Capital which are paid according to their marginal productivity.

4) A flexible system of price - wage - interest prevails.This assumption plays an important part ..

5) Technical neutrality is assumed that is technical progress

does not affect the productivity of capital and efficiency of Labour.

6) There is - full employment of Labour and full utilisation of Capital.

Solow model of economic growth is the benchmark model of economic growth.

The key conclusions are 1) The more that people in an economy save of their income ,the greater the amount of investment ,this lead to economic growth and higher standard of livings.2) A fall in the population growth rate makes more capital available to each person.3) The slower the capital depreciated the more capital is available per person and results in the higher standard of living .All these affects are temporary as economy reaches a steady state its stop growing again Thus increase in savings ,reducing the rate of population growth or reducing the rate at which capital depreciated ,the only means to increase long - run living standards in the Solow model is through continual technological progress.and hence economy need to get better at turning inputs ( land,Labour,Capita).

b) The Solow model also predicts conditional convergence.Basically when two countries have similar characteristics for example similar technology ,saving rate .But one happens to be poorer than the other ,than poorer country tends to grow faster than the richer country .

In unconditional convergence Solow model predicts that in spite of any differences in initial capital Labour ratio all these countries will ultimately converge or will have same standard of living .In conditional convergence Solow model predicts that if countries differ in their saving rates,population growth rate ,they will converge to different steady state with different capital - Labour ratios and different stand of livings It states that if a country has low income and low saving rate may catch up one day with a richer country with a low saving rate.but never catch up with a rich country with high saving rate.

3) The two ways to promote stronger economic growth are

Technological advancement and Increasing savings

4) The great stagnation is a prolonged period of little or no growth in an economy.Economic growth of less than 2% to 3% annually is considered stagnation and it Is highlighted by periods of high unemployment and involuntary employment. Stagnation results in a flat job growth ,nowage increase and absence of market booms or high Stagnation can happen in an advanced economy with economic maturity The great stagnation refers to argues that the American economy has reached a historical technological plateau and driving factors of American growth are mostly spent. Economic growth has falling due to low rate of innovation