Advantages Of Solow Growth Model

The Solow growth model:

The Solow growth model is also called the Neoclassical growth model which is presented by Robert Solow and Swan in 1956. Robert Solow some time later received the Nobel Prize in Economics in 1987 for better thismodel,s theory.

The Solow growth model is an addition of the Harrod-Domar Model. It states the three factors: technology, capital accumulation and labour force which drive economic growth.

Some factors which affecte economic growth:

Factors are following:

.

Use of Technology:

Once the steady-state is reached and all the resources have used up, the economic growth rate can only be increased through innovation and betterments in technology.

Capital and labour force:

The Solow growth model states that a increase

If we will increase one more labourthen our output will also increase. But if the economy have a lot of labour, increasing one more worker will not cause output to rise as much. As a result, the economy will grow at a steady rate, with GDPgrowing at the same rate as the increase in workers and productivity.

Key Terms:

Gross domestic product (GDP) :

– GDP is the total value of all goods and services produced in an economy during a set period of time.

Economic growth :

– Economic growth occure when a country’s production of goods and services increases over time

Domar Model :

– This is a growth model which is used in development economics that states an economy’s rate of growth is dependent on the level of saving and the capital output ratio. Capital stock: – The total physical capital available in an economy at any given time.

Diminishing returns :

– A small rise in one factor of production process will bring forth successively smaller amounts of output.

Productivity :

– This is a measure of output of input per unit.

The Solow-Swan Model overview:

The model shows how economic growth affected by growth in capital stock (KM) and labour (L). It assumes that there is diminishing marginal returns of labour and capital considered separately as inputs and constant returns to scale when both are taken

Gradually this gap widened, and in the past decade this gap has reduced once again. This all show that South Korea has got its level of steady state with the help of capital accumulation. There is better correlation between productivity of labour and human capital accumulation for South Korea. And there is also the GDP does not appear to be slowing down with increase in capital stock of accumulation.

And also, regression result of Y/L and Population Growth rate and Gross savings rate of South Korea, are not consistent with the expected findings from Solow model. However is not entirely observed above. Accumulation of labour and capital plays an important role in economic growth of any country . As I have studied the economic growth of South Korea in which it is clear that this country has achieved economic growth through accumulation of capital and labour. Finally, the above data show better effect of solow theory in the case of South