Question

Why does the Solow model cannot explain growth in the long run? What is the role of decreasing marginal returns of capital in explaining this result?

Answer 1

The Solow model of economic growth suggests a continuous production function that links output to the capital and labor inputs which results in the steady state equilibrium of the economy. In the long run, according to the Steady State model, the economies converge to their steady state and any further permanent growth is achievable only through technological progress. Shifts in both saving and in populational growth cause only level effects in the long-run.