Question

Discuss the roots and implications of the Solow model. How does the Solow model predict convergence? What are the conditions of convergence? How well did the Solow model perform in explaining growth? Make sure you discuss the recent evidence on the convergence debate.

Answer 1

The convergence occurs when two economies having the same steady state had started with different stock capital,then the economies said to be converged. The prediction of solow model is that to check whether the economies convergence is based on why they are different in the first place.

The reason for the different steady state of two economies is due to the difference in rates of saving and in such cases,we can't expect the convergence. In those times,each economy depends on their own steady state.

The theory predicts that,when the growth rate converges,and as result of this convergence firms at a slower rate than the solow model prediction. The Economists found three effect of the solow model and they are,

• There arises a question of exogeneity of progress in technology. It will increase the labour productivity but it is fully exogenous to the economy.
• The automatic technical progress in solow model,and there is no reason why the firms, government and universities make intrest to invest in the R&D
• The government and private agencies having no interest to add the society stock of technical knowledge hence it concludes that there are sort of free rider problems lies with the solow model.