Answer to Question #207007 in Macroeconomics for Thabiso

Question

Use specifically the Solow growth model to discuss the implications of this pandemic 

on the prospects of long-run economic growth for South Africa.

Answer 1

Solution:

The Solow growth model refers to an exogenous model of economic growth that examines changes in the output level in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.

 

The steady-state of the Solow growth model is significant for various reasons. For once, the steady-state is the long-run equilibrium of the economy which indicates that an economy at the steady-state will remain there just as an economy not at the steady-state will go there. Additionally, at the long-run steady-state of the economy, the positive effects on the capital stock per worker from investment exactly balance the negative effects caused by population growth and the depreciation of capital. A key component of economic growth is saving and investment. In the steady-state with population growth, both capital and output per worker are constant, including the saving rate. However, since the number of workers is growing at a particular rate, so must total capital and total output. Thus, population growth can help shed light on the sustained growth in total output.

The factors being affected by the pandemic are the saving rate and the incentives to invest. Similarly, the size of the population is affected as the pandemic affects people in their most productive years. Human capital, which is an important factor for increased total output, and hence total income is also affected by the pandemic. All these factors are outcomes of the Solow model and they tend to impact the long-run economic growth of South Africa due to the pandemic. This is because the pandemic will affect savings and investments, including population growth which are factors of the Solow model.