Question

The Solow Growth Model is an “Exogenous Growth Model”. What does this mean? Is it a good or bad characteristic of the model, why?

Answer 1

Exogenous economic growth models are those that take a change in total factor productivity, or, technological progress as random, and, exogenous. These can be estimated econometrically.

Solow model is a model of capital accumulation in a pure production economy. It is a neoclassical model of economic growth. There is no labour, and, leisure choice. The model is characterized by two equations:

• A capital accumulation equation
• A production function

Technology is available as a non-rival, non-excludable good; it is free.

The Neoclassical Aggregate Production Function
Y (t) = F (A (t) ,K (t) , L (t))
where K (t) is physical capital, L (t) is labor and A (t) is an exogenous technology shift (TFP)

The function is a linear function, it is homogeneous; exhibits constant returns to scale in L, and, K.

Firm profits are zero, from the assumption of homogeneity of degree 1.

The production function can be specified as a Cobb-Douglas function with constant returns to scale. The capital, and, labour share is constant in the long run.

Countries with high population growth rate, tend to be poor. Countries with higher investment, and, saving rate will tend to be richer. Such countries have more output, and, more capital per worker.

K* Steady state value of capital per worker k*

The savings rate, and, the rate of technological advancement are modeled by the Solow model.

The Solow diagram determines the steady state value of output per worker (n+d)k sy ko

Exogenous growth is a good characteristic of the model, given a fixed amount of static technology, and, labour; economic growth ceases, and, the ongoing production reaches a state of equilibrium based on internal demand factors. Exogenous factors are needed to give a fillip to growth, once an equilibrium is reached. This is the model for growth taking factors such as a change in saving rate, and, technological growth.