Answer to Question #65095 in Macroeconomics for Puspa Tripathy

Question

What is meant by steady state in the Solow model? Derive conditions for steady state in
an economy. What is the significance of decreasing returns in the Solow model?

Answer 1

The Solow model is a neoclassical model of an economical growth of Robert Solow. It bases on the Cobb-Douglas production function. In this case a factor of the economical growth is a technical progress. Returns decrease on a sum of investments and consumption. So, we have such an equivalence as:
Y (returns) = I + C
Full employment and new technologies are the main conditions of steady state in an economy.