The Solow growth model is a neoclassical economic model for national economic growth, named after Nobel laureate Robert Solow. It assumes that labor, capital, and knowledge influence GDP growth, with constant return to scale. The model explains the differences between rich and poor countries but fails to take into account numerous economic factors.
A neoclassical economic model for national economic growth is the Solow growth model. Like movie franchises, it’s built on the idea of diminishing returns. This means that each subsequent disbursement will typically generate a lower profit than the previous one.
The Solow growth model is named after Nobel laureate in economics Robert Solow of the Massachusetts Institute of Technology. It began as the Harrod-Domar model, created in 1946 and based on the basic idea of labor and capital affecting a country’s gross domestic product (GDP). Solow, in the 1950s, added man’s developing knowledge, especially regarding technology, to the equation. He distinguishes between old knowledge and new knowledge.
Three variables influence the accumulation of GDP in the Solow model: labour, capital and knowledge. The model assumes that the growth rates of labor and knowledge are constant and assumes that tripling one variable will triple output. These assumptions are called the constant return to scale (CRTS).
A simple economic picture comes from the Solow growth model. The visual graph produces a graph with labor along the horizontal axis and capital along the vertical axis. The interaction between them produces a curved effect. As capital and labor grow from zero, GDP increases at a rapid rate before reaching a midpoint on the graph and begins to contract, producing a steeper curve. As this GDP curve flattens out, the increase in labor produces less than an increase in capital.
Growth in the Solow growth model is strong as capital is built up, but it doesn’t last forever. The model has been used to examine how poorer countries are catching up with the West. Early examples of the Solow growth model were seen in Hong Kong, Taiwan, Singapore and Japan.
According to the model’s predictions, countries such as Japan have begun to save capital and develop their labor and knowledge bases. This led to high GDP growth rates in the 1950s and 1960s, which slowed down thereafter. In Japan’s case, growth stopped altogether around 1990 when its financial bubble burst. With Japan, Singapore, Hong Kong and Taiwan, Solow was right that living standards and GDP would converge as all variables rose.
The model also explains the differences between rich and poor countries. Rich countries have higher savings and relatively low population growth rates. Poor countries have low savings rates and high population growth rates. The model, however, also made several false predictions. Based on savings and manpower, he predicted that the Soviet Union would outperform the United States in the late 20th century.
Numerous economic factors are not taken into account in Solow’s growth model. It fails to examine geography, natural resources, government, and social institutions. It also fails to predict the effects of an aging population and shrinking workforce.
Protect your devices with Threat Protection by NordVPN
