Solow-Swan Growth Model

Solow Swan Growth Model

Solow-Swan Growth Model is an economic model created by Robert Solow and Trevor Swan. This model is similar to Harrod-Domar model which includes other factors such as changes in labor, population and technological progress. According to this model, in order to increase economic growth rate, there must be an increase in capital and labor. However, this is only temporary since there’s a diminishing returns to labor and capital. When the capital per worker and output per worker no longer change, Steady State is reached. When steady state is reached, it also possibly means that resources are no longer available. Solow Swan Growth model concludes that: First, savings is very important for investment and output growth. Second,

His Model explains how growth happens in a dual economy through labor transition/migration from traditional to industrialized sector. Labor transition happens because of the opportunity to earn higher wages in cities. If there’s a high demand for labor in the urban areas, people from the countryside will move in that area. However, the demand for labor is, most of the time, lower than people demanding for job. As a result, surplus labor happens. Because of the existence of surplus labor, wages do not really increase that much and economic growth does not happen as fast as expected (Riley, “Lewis Model of Structural Economic Growth and

Kuznet Hypothesis is also called the Inverted U-Curve. This curve illustrates the behavior and relationship of the two variables in a developing economy. According to this hypothesis, as the economy develops or income per capita increases, economic inequality increases however, at one point, when inequality reaches its peak, it will start to decrease as economy further develops. For instance, in a developing economy, people who have the capital to invest their money have the opportunity to further expand their wealth if they invest the money. On the other hand, those people from rural area will move to the urban area to look for better paying job. However, only those investors or businesses profit while the labor’s wage does not increase due to the existence of surplus labor. Thus, the income gap between the rich/investors and the working class increases and escalates economic inequality. According to Kuznet’s hypothesis, in the long run, when a certain level of average income is reached and the process associated with industrialization such as democratization and development of welfare state, economic inequality decreases (Galbraith 2007). When this happens, the economic benefits will be experience by all social classes and income per capita will further