Answer to Question #236527 in Macroeconomics for Tinaa

Question

Using insights from Solow (1956) model prove that economic productivity ΔlnA is the key determinant of economic growth (Δln y) if output per effective worker is given as  

Answer 1

Solow growth model is an exogenous model. It refers that economic growth due to changes in the level of output is the result of changes in the saving rate, population demographics, or technological changes.

According to the Solow model, policies of the government that encourage private savings and investment result in a long-run improvement in living standards. As per the Solow model, the rate of savings of the economy determines the level of capital and output. It helps in maximizing the consumption per worker and also the economic health.

As per Solow’s growth model, if the firm in the economy produces without any technology change considers capital and labor as inputs. 

Thus, the level of output will be Y, the level of capital will be K, and the level of labor will be L, and the production function equation will be Y = aF(K, L).

It is assumed that the production function will exhibit constant returns to scale. In this, if we reduce the level of capital and the level of labor, in the same proportion the level of output will be reduced. 

As per the Solow model, an increase in the population growth rate increase the growth rate of aggregate output. this will not have a long-run effect on the growth rate of per capita output. An increase in the population growth rate reduces the steady level of per capita output.