Question

The following data are from the Penn World Table for 2000. Country USA France Japan S. Korea Mexico China Uganda Per Capita GDP (2000) 1.0 0.691 0.713 0.556 0.261 0.183 0.027 Investment/Saving Rate 245 .259 361 .439 235 288 .042 Are these data consistent with the Solow model? Explain why or why not. Use a diagram. (Per capita GDP is the same as per capita income).

Answer 1

According to Solow model, a higher savings / investments rate should result in higher output (and therefore higher GDP per capita). We can check if the data in the table are in line with it, in the graph below.

0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0 0.2 0.4 0.6 0.8 1 1.2

GDP per capita is on the horizontal axis and savings rate on vertical axis. The general trend (Uganda vs. USA) is in line with the Solow Model but there are outliers, e.g., S. Korea, which has a very high Savings rate but lower GDP per capita.