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

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Expert Solution

Solow. Proportions of economic growth attributed to growth in capital, labor, and changes in overall productivity
Gy = (Wk x gk) + (WL x GL) + a

Gy = economic growth
Gk = capital stock growth
Gl = labor growth
Wk = share of capital in national income
Wl = Share of labor in national income

According to Prof. Solow, for attaining long run growth, let us assume that capital and labour both increase but capital increases at a faster rate than labour so that the capital labour ratio is high. As the capital labour ratio increases, the output per worker declines and as a result national income falls.The savings of population decline and so does investment and income

Prof. Solow has assumed technical coefficients of production to be variable, so that the capital labour ratio may adjust itself to equilibrium ratio. If the capital labour ratio is larger than equilibrium ratio, than that of the growth of capital and output capital would be lesser than labour force. At some time, the two ratios would be equal to each other.

Rahul Sunny answered 1 year ago

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