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Solow Growth Model

Solow Growth Model – Prosperity Without Growth | Robert Merton Solow

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Solow Growth Model | Prosperity Without Growth | Robert Merton Solow |Solow model Macroeconomics | Importance of Solow growth model | Solow growth model steady-state | Implication of the Solow Growth Model| Solow Growth Model Graph

Solow Model

One of the famous Nobel Prize-winning neo-classical economists, “Robert Merton Solow” developed the long term economic growth model called ‘The Solow Model’ in 1956. The Solow model was developed to improve and clarify the already existed model which was developed by Harrod-Domar. The model developed by Harrod-Domar actually provides an insightful analysis of the balance between the long-run economic system consisting of the key-parameters of capital-output ratio, saving ratio, & the increased rate of the labor force (S, 2012).

 

What are the factors of production in the Solow model of economic growth?

Solow finds a link between three input factors which are labor, capital, and technological growth with the output that is produced (Steven N Durlauf, 2001). Sometimes, the Solow Growth Model is also called the neoclassical growth model the model is developed on the concepts of classical models that are used by the economist because it built on the classical models used by economists before John Maynard Keynes.

 

How do you use the Solow growth model?

Solow model emphasizes that the increase in the growth rate of the country can be achieved by raising the capital investment for the short span of time which is actually because of the capital-labor ratio. Along with capital investment, there must be growth in the labor population for the sustained growth rate of the nation.

 

Solow growth model steady-state

‘Steady-state growth path’ arrives when there is the constant growth of labor, capital, and output or output per capital and labor. In between the various countries because of the advancement or change in technology, the growth rate of the countries varies.

 

We know that the Solow growth model is the long-term economic growth model. This model emphasizes that the economic growth of any of the country can be achieved with the help of these three input factors labor, capital, and technological growth. The concept of Catch-up growth is the major aspect of the Solow Growth Model. Generally, we see that the developing nations or the countries with the poor economy are growing in a faster rate compared to the countries with the good economy which is actually because in countries with the poor economy there are lots of sectors which have the possibility to grow and these countries have high capital investment in the current scenario.

 

The countries with the poor economy do use the technology and other innovations which have already been used and tested by the developed countries (Rubio, 2008). The developed countries have already reached a phase of the technological frontier but the developing countries have the potential chance to further grow their economy with this technology and innovation with the concept of catch-up effect as explained in the Solow Growth Model.

 

For example, As compared to the economy of the United States the economies of India and Bangladesh are growing at a faster rate. This is because these countries are spending a huge amount of their capital in the infrastructural development yielding to the high return. And the other factor is technological usage; these developing countries like India and Bangladesh are following the catch-up effect by using the technologies that have been already used by the United States. The catch-up effect refers to the idea that poor or developing economies grow faster compared to economies with a higher per capita income and gradually reach similar high levels of per capita income.

 

The United States has reached a technological frontier from where growth seems to be difficult but for the developing nations like India and Bangladesh, they have a huge chance to grow. We can also take another example of China which is also one of the fastest-growing economies of the country because of their low labor cost and high involvement in infrastructural development.

 

Conditional Convergence

The concept of ‘Conditional Convergence’ is predicted by this model. It provides an analysis of explaining why even though countries having the same resources & characteristics in terms of technology, saving rates, etc. are not economically similar (Kevin Lee, 2010). In simple words why one country is poor and another is economically rich with similar access which is actually because of the catch-up. If we look at the two countries with different characteristics in terms of usage of technology, institutions, etc. there actually exists no reason to catch up for the poorer country.

Actual Convergence is not predicted by the Solow Growth Model. Further, the model also helps in predicting the countries with poor & rich economies how much convergence actually exists. One of the important aspects that lack this model is the consideration of various aspects like imperfect convergence, corruption, innovation rewards& property rights, the composition of capital stock which are the aspects that actually differentiates the economy of the nation.

 

Prosperity Without Growth

Prosperity without Growth provides a deep analysis of the complex nature of relationships between economic growth, social recession, and environmental crises. It clarifies that not all the time social well-being can be achieved with growth & growth not always sustains for a long period of time. The video provided mainly focuses on the sustainable aspects of economic growth and its contribution to the wellbeing of the human (Martin Fritza, 2014). If we look at the countries with developed economies then we can see that the countries are rapidly growing their infrastructure which is followed by massive urbanization leading to various environmental-related issues. Though these developmental activities are making lives easier but at the same time making lives of human difficult as well.

 

For example, we can see environmental issues in Beijing, China which is the most polluted city in terms of air pollution. The people in Beijing are suffering almost every day because of the pollution over there. Although there are industries established in a massive way creating lots of employment opportunities but still some aspects are still lacking in the well-being of their citizens.

 

It is obvious that the countries with the poor economy does require focusing on economic growth for making the lives of the people better and should focus on developmental activities. But it is a topic to be concerned about whether the countries with a good economy should go with such a rapid pace of developmental activities without being concerned with the environmental issues and well-being of their citizens. The government must be concerned with the long term growth and human wellbeing of its citizens (Bergmann, 2014). There must be proper implementation of legal restrictions regarding environmental protection policies. The companies whose products and services actually degrade the environment must focus on a win-win situation so that it will help in environmental conservation for the long-term.

 

Conclusion

Solow model emphasizes that the economic growth of any of the country can be achieved with the help of these three input factors labor, capital, and technological growth. The countries with the poor economy do use the technology and other innovations which have already been used and tested by the developed countries. The developed countries have already reached a phase of the technological frontier but the developing countries have the potential chance to further grow their economy with this technology and innovation with the concept of catch-up effect as explained in the Solow Growth Model.

 

For the continuous economic growth for the developed economy, the country must focus on factors like developing sustainable prosperity, decreasing inequality, promoting environmental protection, and encouraging personal level investments to achieve financial stability. Prosperity without clarifies that not all the time social well-being can be achieved with growth & growth not always sustains for a long period of time. And the prosperity comes from having a balance between economic growth, social well-being, and environmental conservation.

 

References

Bergmann, B. (2014, December 7). Is Prosperity Possible Without Growth? Journal of Economics, 220-230.

Kevin Lee, M. H. (2010, July 13). Growth and convergence in a multi‐country empirical stochastic Solow model. Journal of Applied Economics, 12(4), 357-392.

Martin Fritza, M. K. (2014, December 21). Potentials for prosperity without growth: Ecological sustainability, social inclusion and the quality of life in 38 countries. Ecological Economics, 108(12), 191-199.

Rubio, O. B. (2008, July 26). A further generalization of the Solow growth model: the role of the public sector. Journal of Economics Letters, 68(1), 79-84.

S, N. (2012, May 15). Solow Model of Economic Growth | Economics. Retrieved from Economics Discussion: http://www.economicsdiscussion.net/economic-growth/solow-model-of-economic-growth-economics/26284

Steven N Durlauf, A. K. (2001, May 17). The local Solow growth model. European Economic Review, 45(4-6), 928-940.

 

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