Home Goal Installing Portals Guests Organization Site Map Partner Websites Registration Diagnose Results Diagnosis
Theories of Economic Growth Pattern of Economic Growth Endogenous Growth Models Macro-Structural Policy Human Capital and Growth Income Distribution and Growth Roles of Market and States What is the Engine of Growth? Innovation and Growth
EconomicGrowth: to bridge the Digital Divide Spanish, English, Japanese
You are now in the "global View"  
Partner:
EconomicGrowth		 Section:
Theories of Economic Growth		 Category:
Solow-Swan Model
Basic Facts(5) Case Study(0) e-Community(0) Organization(0) Event(0) Best Sites(0)
Goals/Activity(0) Opinion Polls(0) Business Partners(0) Applications(-1) Resource Persons(0) Downloads(0)
Q1: What is the neoclassical production function and why is it superior? :1
FAQID:640

: global,

InputDate: 7/8/2006
Reference: Hayami, Yujiro. Development Economics, From the Poverty to the Wealth of Nations, Second Edition, Oxford University Press.
A: The neoclassical production function, which allows substitution between capital and labour, appears more relevent for the analysis of growth in developing economies.
General form of neoclassical production function
The neocalssical production function in its general form

Y=F(L,K;T) (2)

represents the relationship that output (Y) is produced from labour (L) and capital (K) under certain technology (T). This function is assumed to be twice fifferentiable with respect to L and K where their first derivatives are positive, the second derivatives are negative, and cross-derivatives between L and K is positive. T is assumed to influence on the derivatives of L and K.
Cobb-Douglas production function as the special case
Differences between this function and the one used in the Harrod-Domar model can more easily be understood by comparing equation (1) in the previous section, with the so-called Cobb-Douglas production function, which is a special case of the neoclassicla production function.
Harrod-Domar model as the special case
It is easy to see that Harrod-Domar equation (1) is the special case of the Cobb-Douglas equation that the elasticity of output with respect to labour equals zero and elasticity of output with respect to capital equals one.

Knowledge Sharing:
Contributed by: mk Rating: 3

Previous Item

 List of Content Next Item
For all visitors:
For the contributor:

Q2: What is Solow-Swan model? :2
FAQID:641

: global,

InputDate: 7/8/2006
Reference: Hayami, Yujiro. Development Economics, From the Poverty to the Wealth of Nations, Second Edition, Oxford University Press.
A: Using the neoclassical production function, Rober Solow (1956) and Tom Swan (1956) advanced a very different perspective from the Harrod-Domar model on the relationship between capital accumulation and economic growth.
No long-run per capita income growth if there is no technical progress
The Slow-Swan model implies that the growth of income per capita cannot be sustained without continued technological progress. Its perspective on the strategy of economic development is entirely fifferent from the Harrod-Domar model that identified capital accumulation as the engine of development. Clearly the difference stems from different assumptions of the production function.

Slow-Swan model treats technological change as exogenous
Important contribution made by the neoclassical growth model of the Solow-Swan tradition was to slucidate the decisive role of technological change in economic growth. Howeve, its contribution was limited because the model assumed technological change to be given exogenously and did not attempt to incorporate the mechanism within the economy to generate progress in technology.
Endogenous growth model
An attempt to incorporate such mechanism into the model of economic growth is in the recent developments of the "endogenous growth model", which is reviewed in the next section.
Knowledge Sharing:
Contributed by: mk Rating: 3

Previous Item

 List of Content Next Item
For all visitors:
For the contributor:

Q3: What was the implications of Solow's growth theory? :3
FAQID:642

: global,

InputDate: 7/9/2006
Reference: Easterley, William. 2001. The Elusive Quest for Growth, Economists Adventures and Misadventures in the Tropics. The MIT Press.
A: Nobel laureate Robert Solow published his theory of growth in a couple of articles in 1956 and 1957. His conclusion surprised many, and still surprises many today: investment in machinary cannot be a source of growth in the long run. Solow argued that the only possible source of growth in the long run is technological change. Solow in the 1957 article calculated that technological change accounted for seven-eighths of US growth per worker over the first half of the twenties century.
Capital fundamentalists
Economists call the belief that increasing building and machinary is the fundamental determinant of growth capital fundamentalism. Whether capital fundamentalism hold is fiercely debated in the academic literature on growth; we will see that capital fundamentalism is incompatible with "people respond to incentive."
Diminishing returns prevents sustained growth per worker
Surprising implication of Solow's view was that saving will not sustain growth. The saving diverts money from consumpltion today toward buying machinary for the production tomorrow, but this does not raise the long-term rate of growth. So high-saving economies would achieve no higher sustained growth than low-saving economy would. Growth in both cases would drop to zero as the unavoidable diminishing returns to increasing machines set in. The high saving economy would have higher income than the low-saving economy, but neither would be able to sustain growth.
Capital contribution to the producyion of GDP is one-third
How severe these diminishing returns are going to be depends on how important capital is in production. A lot of the debate about capital fundamentalism will turn on how important capital is as an ingredient to production. The reason that Solow's diminishing return to investment has particular fury was that building and machinary are a surprisingly minor ingredient in total GDP. We can get a measure of the importance of capital in the US by calculatingthe share of capital income in total income. Capital income means all the income that accrues to the direct and indirect owners of the buildings and machines: corporate profits, stock dividends, and interest income on loans. Solow estimated capital income to be about one-third of total income today. The other two-thirds of income is wage income, that is, income to workers.

How to explain the sustained growth in industrial countries
Here was Solow's surprise: the simple logic of production suggested that growth of output per worker could not be sustained. Yet the US and many other industrial economies had already sustained economic growth of 2 percent per worker for two centuries. How did we observe sustained growth of output per worker when such sustained growth is not logically possible?
Reference:
Solow, Robert M. 1957. The Technical Change and the Aggregate Production Function. Review of Economics and Statistics 39:312-320

Knowledge Sharing:
Contributed by: mk Rating: 4

Previous Item

 List of Content Next Item
For all visitors:
For the contributor:

Q4: What are the important aspects of the Solow's model? :3.1
FAQID:821

: global,

InputDate: 1/22/2007
Reference: CRAFTS, NICK. 1996. 'PostNeoclassical Endogenous Growth Theory': What are its Policy Implications? Oxford Review of Economic Policy. VOL. 12. NO. 2
A: Five important aspects of this formulation are the following.
Investment ratio has no permanet effect on growth rate
In the long run, growth is independent of the investment rate; policies to promote investment run into diminishing returns, ultimately affect only the level of output per head, and have only transitory effects on the growth rate.
Share of capital is equal to the elasticity of output to capital
The share of profits in national income equals a, the elasticity of output with respect to capital, and can be used to estimate the impact of capital accumulation on the growth rate.
Productivity growth is determined by exogenous technological progress
Growth of long-run income per person is pro portional to the growth rate of TFP and thus requires improvements in technology, which is not determined within the model and cannot be influenced by policy-makers. Growth is exogenous rather than endogenous.

Steady state growth rates should be the same in all countries
If technological knowledge is universally available, the level and rate of change of TFP and steady-state growth rates should be the same in all countries. Equilibrium income levels would differ only if capital to labour ratios did not equalize.
Per capita income level will converge
Out of the steady state, countries which have low initial income levels and capital to labour ratios should grow more quickly for a given savings rate because they will have relatively low capital to output ratios.
Knowledge Sharing:
Contributed by: mk Rating: 3

Previous Item

 List of Content Next Item
For all visitors:
For the contributor:

Q5: What is the implication of Solow model? :3.1
FAQID:1001

: global,

InputDate: 8/11/2007
Reference: FAGERBERG, JAN. 1994. "Technology and International Differences in Growth Rates". Journal of Economic Literature Vol. XXXII (September 1994), pp. 1147-1175
A: Solow's model has become the staandar neo-classical growth model after 1950's. This model has a standard neo-classical assumprins, such as perfect competition and the production function is subject to decreasing marginal return (namely when Capital is is increased relative to labour, its marginal contribution to the production will decrease). Because of the substitutions between capital and labour, market is always in equilibrium in the sense that all the firms maximize their production under the limitation of capital and labor, using technologies which are known to everybody (public goods). Solow's model is a good framework to explain growth from neo-calassical world. But it has an implication which is not compatible with the reality of the economic growth. Fagerber (1994) made a good summary of the contradictions, which led many economist to develop various "growth theories" to fill that gap.
In the long-run, equilibrium, GDP, Capital stock, labour grows at the same rate
In this model, productivity growth results form increases in the amount of capital that each worker is set to operate. However, as capital per worker increases, the marginal productivity of capital declines, and with it the scope for further increases in the capital-labor ratio. Ultimately, the capital-labor ratio approaches a constant, and productivity growth ceases. In this long-run equilibrium gross domestic product, the capital stock, and the labor force all grow at the same, exogenously determined rate.

Technological progress is defined exogenously
It was at this point that technological progress came into play. To allow for long-run growth in GDP per capita, Solow (1956, 1957) added an exogenous term, labeled "technological progress. " In this interpretation, technology--or Knowledge is a "free" good, i. e., something that is accessible for everybody free of charge. Solow did not discuss the implications of this for a multi-country world. But subsequent research based on the neoclassical perspective took it for granted that if technology--or knowledge- is freely available in, say, the USA, it will be so at the global level as well. On this assumption the neoclassical model of economic growth predicts that, in the long run, GDP per capita in all countries will grow at the same, exogenously determined rate of technological progress.
Par Capita DGP growth can difer only in the transitional dynamics
The only factor left within this framework that can explain differences in per capita growth across countries is "transitional dynamics": because initial conditions generally differ, countries may grow at different rates in the process towards long-run equilibrium. A case can be made, then, for poor countries growing faster than the richer ones: countries where capital is scarce compared to labor (i.e., where the capital-labor ratio is low) should be expected to have a higher rate of profit on capital, a higher rate of capital accumulation and higher per capita growth.

Gap in productivity is expected to disappear quickly
To the extent that capital is internationally mobile, and moves to the countries where the prospects for profits are highest, this tendency should be considerably strengthened. Hence, the gaps in income levels between rich and poor countries should be expected to narrow and-ultimately--disappear.

Reference:
"A Contribution to the Theory of Economic Growth," Quart.J. Econ., Feb. 1956, 70(1), pp. 65-94.

SOLOW,ROBERT M. "Technical Change and the Aggregate Production Function," Rev. Econ. Statist., Aug. 1957, 39(3), pp. 312-20.

Knowledge Sharing:
Contributed by: mk Rating: 3

Previous Item

 List of Content Next Item
For all visitors:
For the contributor:

To send information to "Basic Facts", go to the Send Basic Facts Page

Key Word Search:
Edit the documents(Admine use only)