Question

Why does the economy always go against equilibrium in the Solow model?

Answer 1

Economy always goes against equilibrium in the Solow's model because of the follwoing reasons:

The key parameter of Solow’s model is the substitutability between capital and labour. In this model he assumes constant rate of reproduction and constant saving ratio and shows that substitutability between capital and labour can bring equality between warranted growth rate (Gw) and natural growth rate (Gn) and economy moves on the equilibrium path of growth.

The Solow model is also based on the unrealistic assumption of homogeneous and malleable capital. As a matter of fact, capital goods are highly heterogeneous and thus pose the problem of aggregation. Consequently, it is not easy to arrive at the steady growth path when there are varieties of capital goods.

Solow takes up only the problem of balance between warranted growth (Gw) and natural growth (Gn) but it does not take into account the problem of balance between warranted growth and the actual growth (G and Gw).

In Solow's model, he has left the study of technological progress. He considered it as an exogenous factor in the growth process. He doesnt address the problem of inducing technical progress through the process of learning, investment and capital accumulation.