Question

Can you please list the important takeaways from the Solow Growth Model?
(Looking to answer MCQs based on this concept)

Answer 1

The neoclassical theory of economic growth was developed by Robert Solow and he won the noble prize in Economics in 1987. A huge contribution was made by him to the understanding of factors determining the rate of economic growth for different countries.
Key points of the Solow Model are -
i). This model believes a sustained increase in capital investment leads to a temporary increase in the rate of growth because the ratio of capital to labor will go up.
ii). However, there might be a decline in the marginal product of additional units of capital and as a result of it, the economy will move back to a long term growth path with the growth in real GDP at the same rate at which growth of workforce plus a factor to reflect improving productivity happens.
iii). When there is the same growth rate of output, capital, labor then a steady-state growth path is reached. Thus output and capital per worker are constant.
iv). Robert Solow believes that an increase in labor supply and a higher level of productivity of labor and capital are required to raise the trend rate of growth.
v). There are differences in the pace of technological changes among countries that explain variation in the rate of growth of the countries.
vi). Productivity improvements are treated as an exogenous variable, that is assumed to be free from dependence on the amount of capital investment.
vii). The idea of catch up growth is featured when a poorer country catches up with richer countries because in the faster-growing countries is a higher marginal rate of return on invested capital.
viii). Some convergence of living standards is predicted by this model but the catch-up extent in living standard is questioned. The existence of a middle-income trap is found hard to sustain growth and raise per capita income beyond a certain level when economies are growing.