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?

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 2 years ago

Economic growth a. According to the Solow model of economic growth, what determines the growth rate of...

Economic growth a. According to the Solow model of economic growth, what determines the growth rate of real income per person in the very long run (steady state)? Explain. b. What public policies have been proposed to increase the rate of economic growth? Explain.

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

solow growth model describes what

1. In the Solow growth model, the rate of economic growth in the long run depends...

1. In the Solow growth model, the rate of economic growth in the long run depends on a. the rate of progress of the “effectiveness” of inputs or the growth rate of total factor productivity b. the population growth rate c. the savings rate d. the level of education of the population 2. The rate of economic growth of output per worker in the US between 1800 and 2011 a. depended mostly on changes in TFP (total factor productivity) b....

Can the solow model explain economic growth if there is an increase in the manufacturing sector...

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?

(a) State the central conclusion of the Solow model of economic growth. (b) In terms of...

(a) State the central conclusion of the Solow model of economic growth. (b) In terms of the Solow growth model, discuss the convergence hypothesis. (c) List two ways to promote stronger economic growth. (d) Describe the growth slowdown that has been labelled “The Great Stagnation”.

Which of the following is true about the Solow Growth Model? a. In the Solow Growth...

Which of the following is true about the Solow Growth Model? a. In the Solow Growth model consumption per person always rises as k rises b. At a steady state the economy keeps growing with aggregate K, Y, C for example all rising over time c. At steady state the following condition must always hold at k*: sy=(n+d)k d. When the economy is below steady-state level of capital-per-worker then savings per worker is higher than breakeven investment e. Golden rule...

What is balanced growth in the Solow growth model? Is it true in the real world?...

What is balanced growth in the Solow growth model? Is it true in the real world? Give an example. Use the Solow growth model to explain the following statements (assume the model with no technological change and no population growth): for a given production function and depreciation rate, the saving rate determines the level of output per worker. a higher saving rate will not necessarily generate more consumption per worker. a higher saving rate will not produce a faster steady-state...

In the basic Solow model, an economy in a steady state has an economic growth rate...

In the basic Solow model, an economy in a steady state has an economic growth rate equal to a. The depreciation rate b. The savings rate c. The marginal product of capital d. Zero 2. Long time lags in the implementation of monetary policy a. Reduce the ability of the Fed to manage the economy b. Enhance the ability of the Fed to manage the economy c. Reduce the monetary base d. Increase the monetary base 3. An important principle...

Analyse and contrast the IS-LM model to the Solow Growth Model

Question