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

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

model?

Solutions

Expert Solution

The solow model focusses on the following factors that determine growth:

1. Saving rate or investment

2. Rate of depriciation

3. Population Growth rate

4. Technological advancements

Let us consider these in detail:

1. Saving rate or investment: Higher is the saving rate, higher will be the investment in the economy. Due to this, capital per worker will rise.

Now, solow model tells us that output per worker is the function of capital per worker, or

y = f (k)

When capital per worker increases, the output also increases. Due to this, the total output will rise.

Hence, rising saving rate will promote growth rate and declining saving rate will lower the growth rate of an economy.

2. Rate of depriciation: Rate of depriciation is the rate at which capital erodes in an economy. Higher is the rate of depriciation in an economy, lower will be the output per worker. Thus, higher depriciation rate will lower the growth rate.

3. Population growth rate: Higher is the population growth rate, lower will be the capital per worker. This will lead to decline in output per worker and steady state of output will reduce. However, the rise in number of workers will led to rise in total output.

Thus, population growth works as a driver of economic growth only when the saving rate and investment is also rising at the same rate. Otherwise, it becomes a hindrance for economic growth.

4. Technological advancements: Technological advancements lead to rise in capital per worker in the economy. Output also rises due to this. Thus, it is a driver of economic growth in the Solow model.

Rahul Sunny answered 1 year ago

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