(a) State the central conclusion of the Solow model of economic growth. (b) In terms of...

(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”.

Expert Solution

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

Rahul Sunny answered 2 years ago

What drives economic growth in the Solow model? What reduces economic growth in the Solow model?

In the basic Solow model, an economy in a steady state has an economic growth rate...

In the basic Solow model, an economy in a steady state has an economic growth rate equal to a. The depreciation rate b. The savings rate c. The marginal product of capital d. Zero 2. Long time lags in the implementation of monetary policy a. Reduce the ability of the Fed to manage the economy b. Enhance the ability of the Fed to manage the economy c. Reduce the monetary base d. Increase the monetary base 3. An important principle...

Economic growth a. According to the Solow model of economic growth, what determines the growth rate of...

Economic growth a. According to the Solow model of economic growth, what determines the growth rate of real income per person in the very long run (steady state)? Explain. b. What public policies have been proposed to increase the rate of economic growth? Explain.

In the Solow model, the relationship between growth in capital stock and economic growth is not...

In the Solow model, the relationship between growth in capital stock and economic growth is not linear due to the model’s dependence on a production function that exhibits diminishing returns to capital. Therefore, the perceived impact of capital accumulation on economic growth requires the interplay of technological change and factor productivity. Explain this statement with the aid of the basic model: g = Wk x gk + WL x gL + a

1. In the Solow growth model, the rate of economic growth in the long run depends...

1. In the Solow growth model, the rate of economic growth in the long run depends on a. the rate of progress of the “effectiveness” of inputs or the growth rate of total factor productivity b. the population growth rate c. the savings rate d. the level of education of the population 2. The rate of economic growth of output per worker in the US between 1800 and 2011 a. depended mostly on changes in TFP (total factor productivity) b....

According to the Solow model of growth, growth, in the long run (the steady-state), determine only...

According to the Solow model of growth, growth, in the long run (the steady-state), determine only by growth in technology. However, in the Solow model, there is nothing about how technology determined. 1. What factors do you think might affect technology in the long run? 2. Justify your answer and explain the implications to the growth in the long run.

Can the solow model explain economic growth if there is an increase in the manufacturing sector...

Can the solow model explain economic growth if there is an increase in the manufacturing sector or aggriculture sector in a country? For example, how would a recent increase in manufacturing or aggriculture affect the solow model? Also, an increase in capital or investment only leads to short term growth right? The only way for long term growth is through technological progress?

Solow growth model: steady state. What does it mean for the economy to be in the...

Solow growth model: steady state. What does it mean for the economy to be in the steady state? How is the steady state determined? How does steady-state output per person depend upon the investment and depreciation rates? Explain why an increase in the investment rate raises steady-state y. What are the effects of a rise in TFP or a fall in the rate of depreciation on steady-state y?

Consider an economy at the steady state according to the Solow Growth Model with a per...

Consider an economy at the steady state according to the Solow Growth Model with a per capita production function where n=0.04, d=0.08, and s=0.3. Suppose a change in the age profile of the population leads to a reduction of the savings rate to s=0.28. As a result, consumption initially falls and continues to decline until reaching the new steady state. consumption initially rises and continues to increase until reaching the new steady state. that is above the original. consumption initially rises...

Which of the following is true about the Solow Growth Model? a. In the Solow Growth...

Which of the following is true about the Solow Growth Model? a. In the Solow Growth model consumption per person always rises as k rises b. At a steady state the economy keeps growing with aggregate K, Y, C for example all rising over time c. At steady state the following condition must always hold at k*: sy=(n+d)k d. When the economy is below steady-state level of capital-per-worker then savings per worker is higher than breakeven investment e. Golden rule...

Question