Answer to Question #207055 in Macroeconomics for Faith

Question

Use the Solow growth model to discuss the implications of this pandemic on the change in productivity or labour efficiency on long-run economic growth- include graph

Answer 1

The Solow growth model explains how making savings, growing the labor force and technical progresses affect the capital accumulation and output of an economy in the long run. When capital stock grows and the output of the economy increases, there is more occurrence of economic growth.

In this model the production function states that the level of output depends on the level of capital stock , the labor force and the efficiency of labor. The labor efficiency is a picture of the society's know- how on production methods. The efficiency of labor rises as technology improves. Each hour of work in this case produces more output. In this model, the break-even investment is needed to keep the capital per effective worker constant.

Since the covid-19 pandemic affects the growth of labor and technical progresses negatively, the rate of capital accumulation and general output of the economy is also adversely affected. The growth of capital stock slows down and likewise the output of the economy decreases hindering faster economic growth.

The following graph illustrates the production function, the investment function and the break-even investment line for the economy in the long run.