Question

Question 8

Evolution of the Solow Model.

In introducing constant technological growth, the General Solow Model addressed what weakness of the Basic Solow Model.
Introducing the Human Capital Model helped address what 2 weaknesses of the General Solow Model.

Answer 1

The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.

1.Countries with different saving rates have different steady states, and they will not converge, i.e. the Solow Growth Model does not predict absolute convergence. When saving rates are different, growth is not always higher in a country with lower initial capital stock

2.There is no growth in the long term. If countries have the same g (population growth rate), s (savings rate), and d (capital depreciation rate), then they have the same steady state, so they will converge, i.e., the Solow Growth Model predicts conditional convergence. Along this convergence path, a poorer country grows faster

Conclusion :

One crucial weakness of the Solow model is the ad-hoc assumption of a constant
saving rate. Some questions to be considered are:
a) Is this consistent with optimal, utility-maximizing consumer behavior?
b) If we had a utility function, we could model optimal consumption and saving
behavior and also perform welfare analysis balancing present vs. future.
c) That is the role of the Ramsey model, to which we now turn.