Question

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?

Answer 1

In a Solow growth model the growth rate of a sector or economy as a whole can be increases through increasing the share of GDP invested that is increasing investment or with technological progress .Rich countries are those with high share of GDP invested for a long time.Here the increase in investment can be taken into account for manufacturing sector.Similarly capital intensive and technological advanced agriculture sector leads to high output..The Solow model is economic model of long run economic growth it takes into account long run economic growth by taking into account capital investment ,population growth and increasing productivity which are of long run category.The Solow model believes that a sustained rise in capital investments increases the growth rate only temporarily because of the increase in the ratio of capital / Labour but because of the diminishing returns the marginal product of additional units of capital declines hence rate of growth of an economy requires a higher level of productivity through technical progress in long run