Question

In the Solow growth model, if we assume the standard properties of the production technology, which are discussed in class, the economy tends to move toward the steady state with positive capital stock per worker.

Answer 1

Solow model demonstrates the changing nature of technical coefficients ,capital- labour ratio and capital -output ratio.There will be a tendency for the capital -labour ratio to adjust itself to equilibrium ration ,even the initial capital -labour ratio is greater than equilibrium ration, in which capital -output ratio will grow slower than labour force .A time will come when the two ratios would be equal to each other.Solow analysis thus has the converging tendency towards the equilibrium path of steady state ,whatever may be the capital -labour ratio. Solow consider the dual economy with two sectors- capital or industrial sector and Labour or agriculture sector .In the capital sector,the rate of capital accumulation exceeds the rate of labour absorption. More employment opportunities are possible in this capital sector. In an under developed economy,agriculture sector is marked by existence of agriculture sector and shortage of skilled labour.Real wage would be very low. Under such condition,steady growth is possible only if amount of capital is higher than relative to amount of labour, that means steady growth rate would be possible only with increase in capital stock per worker .This situation arises,when the rate of output growth is not equal to capital -labour ratio