Solow Model
What are the main limitations of the Solow model? Discuss with reference to theory and evidence.
The Solow Model, also known as the neoclassical growth model or exogenous growth model is a neoclassical attempt created in the mid twentieth century, to explain long run economic growth by examining productivity, technological progress, capital accumulation and population growth. This model was contributed to by the works of Robert Solow, in his essay ‘A Contribution to the Theory of Economic Growth’ and by Trevor Swan in his work, ‘Economic Growth and Capital Accumulation’, both published in 1956. The model is perceived to be an extension of the 1946 Harrod-Domar model, which Solow (1956) describes as a ‘model of long-run growth which accepts all the Harrod-Domar assumptions except that of fixed proportions.’ Instead Solow (1956) supposes that a ‘single composite commodity is produced by labour and capital under the standard neoclassical conditions.’ This notion will be elaborated on further in the course of this essay. Economists today use the Solow model source of growth accounting to estimate the individual effects on economic growth of capital, labour and technological change and thus the model is contemporarily significant. This essay aims to first and foremost outline the assumptions and features of the Solow Model and explain them. It will follow with a discussion of the determinants of economic growth within the model and highlight the limitations within the framework of the model. Finally, this essay will evaluate the effectiveness of the model in determining long-term growth.
Assumptions:
In this model, Solow makes a number of assumptions that have been critiqued by many theorists as being limitations of the model it self. The first of these is that the model is constructed amidst a one good economy and the good is homogenous in nature. As there is only one good produced, consumed and invested in, the economy is abstracted from any trade.
The
The Solow Model, also known as the neoclassical growth model or exogenous growth model is a neoclassical attempt created in the mid twentieth century, to explain long run economic growth by examining productivity, technological progress, capital accumulation and population growth. This model was contributed to by the works of Robert Solow, in his essay ‘A Contribution to the Theory of Economic Growth’ and by Trevor Swan in his work, ‘Economic Growth and Capital Accumulation’, both published in 1956. The model is perceived to be an extension of the 1946 Harrod-Domar model, which Solow (1956) describes as a ‘model of long-run growth which accepts all the Harrod-Domar assumptions except that of fixed proportions.’ Instead Solow (1956) supposes that a ‘single composite commodity is produced by labour and capital under the standard neoclassical conditions.’ This notion will be elaborated on further in the course of this essay. Economists today use the Solow model source of growth accounting to estimate the individual effects on economic growth of capital, labour and technological change and thus the model is contemporarily significant. This essay aims to first and foremost outline the assumptions and features of the Solow Model and explain them. It will follow with a discussion of the determinants of economic growth within the model and highlight the limitations within the framework of the model. Finally, this essay will evaluate the effectiveness of the model in determining long-term growth.
Assumptions:
In this model, Solow makes a number of assumptions that have been critiqued by many theorists as being limitations of the model it self. The first of these is that the model is constructed amidst a one good economy and the good is homogenous in nature. As there is only one good produced, consumed and invested in, the economy is abstracted from any trade.
The
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