Solow Model Essay
THE MODEL APPROACH:
The model mainly focuses to show how consistent growth can be achieved in an economy through infrastructure, i.e., endogenously with the help of a production function that is linear on the stock of capital. The model which is presented here is an endogenous growth model: THE AK MODEL. The AK model is a departure from the simple Solow model of growth. The standard Solow model predicts that growth in the long run is achievable only through technological progress or increase in the savings rate which takes us to the level of steady state equilibrium.The major drawback of the Solow model is that growth can only be achieved by exogenous factors. However, by relaxing the assumption of the diminishing returns and in turn taking
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We can assume CRS because we have interpreted capital (K) more broadly. If K included only capital stock of goods, with rise in K efficiency would fall and output (Y) would rise at a slower rate. But since here K also includes infrastructure it guarantees CRS since it is an important input into the economy’s production of goods and …show more content…
The line sy which denotes the amount invested is linear and proportional to y=Ak line since s is constant and y increases at a constant rate.
The line δk denotes the amount of capital depreciates is linear as δ is constant.
The horizontal axis denotes the capital labour ratio (k).
The vertical axis measures the output per capita (y).
Since the production function is now linear, the line denoting the amount of investment never crosses the δk line. Hence there is no steady state and sA>δ i.e. the growth is continuous.
Fig 1.2 shows the growth process in the Solow model.
Comparing the two diagrams we see In the Solow model the rate of growth initially jumps to a higher level but then it declines slowly over time till it returns to the steady state.
In A.K model there is no tendency the rate of growth to decline as time goes by i.e. there is no convergence to steady state and the growth process is never ending but continuous and consistent. δk y=Y/L y=f(k) sy
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