Answer to Question #127024 in Macroeconomics for Shannaya islam

Question

What is the mechanism in the Solow model that generates growth? Why is this an appealing
mechanism? Why does it fail to deliver economic growth in the long run? What is the solution of
the Solow model for consumption per person in the steady-state?

Answer 1

In R. Solow's model, GDP growth is explained by population growth, technological progress and investment. In long-term development, GDP growth is determined by population growth and the rate of technological development.

Solow's model is an analysis of economic growth, taking into account the influence of external technical progress, as well as the impact of production factors - capital and labor. There are three main goals of this model: Search for methods of stable and high rates of economic growth. Maximizing consumption volumes. Analysis of the influence of factors of demographic growth and the introduction of the latest technologies.

The purpose of this model is to answer very important questions of economic theory and economic policy; what are the factors of balanced economic growth; what growth rate the economy can afford for the given parameters of the economic system and how to maximize income per capita and consumption volume; what is the impact of population growth, capital accumulation and technological progress on economic growth rates. Solow's model shows not only the possibility of equilibrium economic growth with full employment and full utilization of production capacity.

An increase in the saving rate does not affect the long-term growth rate of output, but only increases the capital-labor ratio and per capita income in the long run. This conclusion may seem unexpected and contradict the fact that investment and economic growth are closely related. This seeming contradiction can be explained by the fact that a steady state of the economy is inherent in far from all countries. If the economy is not characterized by a state of equilibrium, then it is going through a development process, and this process can be very lengthy.

In the Solow model in a stationary state, the rate of growth of labor productivity is equal to the rate of technical progress, and the rate of economic growth is the sum of the rate of technological progress and the rate of population growth [17].

With an increase in the savings rate, investments exceed the outflow of capital, the capital stock per unit of effective labor grows until equilibrium is reached at a higher level of capital stock per unit of effective labor. In the process of transition to a new stationary state, the growth rate of labor productivity will outstrip the rate of technical progress, and when a new equilibrium is achieved, they will become equal