Question

The subject is Macroeconomics: I’d like the answer to be a rather long rant instead of short and tangible.

During this year’s Danish parliament elections, the subject of national growth over longer periods of time, a common subject during election campaigns, was surprisingly not one of the main themes.

One commenter’s opinion was the politicians are busy splitting the economical “cake”, instead of reassuring that the “cake” is growing.

1. Explain the importance of long-term growth according to the Solow model.
2. Discuss how a larger workforce, a side effect of migration and increased retirement age are affecting national growth.

Answer 1

Solow emphasizes the importance of long term economic growth as it is more sustainable and has a steady growth rate, not the fluctuating ones which is present in the short run. He states that capital/labor is stable and constant in the long run which is why the real wage and interest rates are constant. The saving rate has no effect on the long run rate of growth. It considers several assumptions and mentions that long term growth can only be achieved by technological change.

Larger workforce is creating some sort of unemployment as per capita income decreases because of the large supply of workforce. This dis-incentivises people from working hard as their remuneration is low. This leads to decline in national growth as there is some form of unemployment which reduces productivity and investment in the country. Less pay decreases the chances of saving extensive amount leading to low investment. Because of low investment there is less innovation and technological change as people don't get capital. This virtuous cycle reduces the national growth rate as output per capita falls.

The politicians might not be reassuring that the cake is growing because there could be no possible drastic growth increase which they can credit themselves with. Its yearly growth has reduced from 2.6 to 2.2 which gives them enough reasons to show growth somewhere else or contribute degrowth to some other factor.