Question

Set up the Solow model with non-renewable resources incorporated. Derive the growth rate of output per worker along the balanced growth path. Explain and illustrate the threat to sustainability posed by the use of natural resources and over-exploitation in developing countries. How can the government raise the economy’s long-run growth rate?

Answer 1

Solow Model of Growth:- Prof. R.M. Solow makes his model of economic growth upon the Harrod-Domar model. It is the basic modern theory of economic growth.

The model:- In the model, Solow shows that there is same tendency of capital-labor to adjust itself through time in the direction of balance. He says that if the ratio of the capital to labor is more, capital and output would increase slowly than labor.
Solow take one compound commodity in the economy. And its yearly rate of production is represented by Y(t), which represent real income and part of it consumed and rest of it saved and invested.
The steady state is the basic to comprehensing the Solow Model. At the steady state an investment is equivalent to depreciation. That means that all of investment is being accustomed to mend and restore the existing capital stock.
Diagram :-

The threat to sustainability posed by the use of natural resources and over-exploitation in developing countries:-

A healthy environment provides the essentials of life, like water, food and air. It also supplies resources for economic growth and the factors to fight natural risks. The welfare of developing countries is often associated to the state of the natural environment and the chances it offers. So if the developing countries will over exploits the natural resources, it would become threat to sustainability.

Monetary and fiscal policy are accustomed to monitor the economy, economic growth, and inflation so that long-run growth is achievable. Government activities used to develop long-run growth include inspiring economic growth, executing monetary policies, fixing the exchange rates, and using wage and price controls.