Question

Both China and India have averaged around 7% GDP growth rates over the last 5 years while the US and Japan have averaged around 2%. The population growth rates for the US and China and Japan are all under 1% (.5% for China, .8% for the US, and −.1% for Japan) while India’s is 1.2% (also relatively modest). Discuss these facts in the context of a Solow-Swan growth model, clearly explaining your reasoning.

Answer 1

Solow-Swan growth model is based on long run economic growth by looking at country's capital accumulation, population growth and increase in productivity.

Solow model states that poor countries should grow faster and eventually meet up to developed countries who are richer. This is what is happenning in this case as well, China and India are growing much faster whereas Japan and US are growing at a slower pace. This is because of the fact that Japan and US are already developed and don't generate as much output because of less population, whereas India and China generate a lot of output in terms of infrastructure spend and huge development projects, also because the population is much more. Also according to the model, poor countries converge with time as technology and information is shared much faster. Capital accumulation is efficient as rate of return is higher in developing nations.

Shift in population growth causes changes in absolute value of real income per capita. Thus even though population growth is almost same in US and China, while it is negative in Japan and modest in India. Both China and India's population is very large, thus even a small percentage increase causes huge increase in demand for goods and services but with less population growth the per capita income and output would increase. Whereas US and Japan's current population is fairly low. Thus this model predicts that with same level of population growth, and technology, all countries growth will converge to the same level in the long run. All four countries population growth rates will have to be same in order to converge to the same state steady level in the long run, which is not the case currently.