According to Solow’s model of economic growth, what determines the rate at which a nation’s income...

According to Solow’s model of economic growth, what determines the rate at which a nation’s income per person grows? Based on that model, what can a nation’s government do (if anything) to increase that growth rate either temporarily or permanently? Give 2 specific examples.

Expert Solution

According to Solow’s model of economic growth, "Technological Progress" determines the rate at which a nation’s income per person grows.

So, in order to permanently increase the growth, government must increase technological progress.

Solow model predicts that if a country is far away from its steady state then it will grow faster as compared to a country which is at or near its steady state. An increase in savings rate raises the steady state level of capital and output. So if savings rate increases, the country will be farther from steady state than it earlier was. And untill it reaches the new steady state, the growth of country will be increased (though temporarily). A decrease in the rate of population growth will also have a similar effect.

Two specific examples are of Japan and Germany, who experienced massive growth after world war II due to their increased savings rate, and since their capital was destroyed in the war (i.e. moved farther away from their steady state level of capital)

Rahul Sunny answered 2 years ago

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