Why is the GDP per capita predicted by the Solow model for several developing countries higher...

Why is the GDP per capita predicted by the Solow model for several developing countries higher than the actual GDP per capita that we observe from the data?

Expert Solution

The GDP per capita predicted by the Solow model for several developing countries is higher than the actual GDP per capita that we observe from the data. If the two developing economies having same steady state had begun with different capital stocks then they are expected to converge but if the two economies are having different steady states because of different savings, then there can be no convergence. The main reasons for the difference in actual GDP and the GDP predicted by the Solow Model are as follows:

1. There is augmentation to the labour productivity due to the exogeneity of the technological progress.

2. The progress in technology occurs in the Solow model automatically, therefore the firms, universities, research institutes and governments have no reason to invest in R&D.

3. The private agencies as well as the governments have zero incentive to contribute to the society’s stock of technical knowledge and the technical progress. Hence there is problem of free rider in the Solow model.

As per the Solow model if there is free movement of capital across countries then it will flow from rich countries to the poor countries.

Rahul Sunny answered 1 year ago

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