The Solow Growth Model
The Solow Growth Model
Economics 202
14 April 2014
Statement on plagiarism: I understand that plagiarism is a serious offence and confirm that unless otherwise acknowledged the content of this essay is my own.
Economic growth rates across countries are hardly ever the same and the Solow-growth model is the starting point at determining why growth rates differ across countries (Burda and Wyplosz, 2013: 61). This essay aims at examining the aspects of the Solow-Growth model of economic growth while highlighting the strengths and weaknesses and identifying whether or not capital accumulation has been the main cause for economic growth in South Africa. This will be achieved through examining economic growth with capital-stock growth, population growth and technological progress.
The Solow-growth model measures growth rates of different economies and according to Solow, it is the starting point to determining why these growth rates differ across economies (Burda and Wyplosz, 2013). The Solow-growth model is an exogenous growth model which means variables are determined outside the field under study, making it a traditional Neo-classical growth model (Liu, 2007: 6). The Solow-growth model examines the economy and its growth rates by examining and comparing results from capital accumulation, population growth and technological progress (Burda and Wyplosz 2013: 61-77). The growth phenomenon works like this: Savings accumulated from households flows into financial systems which in turn channels these savings to borrowers (Burda and Wyplosz, 2013: 61). Firms borrow these savings in the form of capital goods that will aid them in production processes (Burda and Wyplosz, 2013: 61). Assuming that the economy’s capital stock is ultimately financed by households’ savings, let us examine the economy’s Steady State when there is no population growth or technological progress involved. The Steady State below relates an economy’s
Economics 202
14 April 2014
Statement on plagiarism: I understand that plagiarism is a serious offence and confirm that unless otherwise acknowledged the content of this essay is my own.
Economic growth rates across countries are hardly ever the same and the Solow-growth model is the starting point at determining why growth rates differ across countries (Burda and Wyplosz, 2013: 61). This essay aims at examining the aspects of the Solow-Growth model of economic growth while highlighting the strengths and weaknesses and identifying whether or not capital accumulation has been the main cause for economic growth in South Africa. This will be achieved through examining economic growth with capital-stock growth, population growth and technological progress.
The Solow-growth model measures growth rates of different economies and according to Solow, it is the starting point to determining why these growth rates differ across economies (Burda and Wyplosz, 2013). The Solow-growth model is an exogenous growth model which means variables are determined outside the field under study, making it a traditional Neo-classical growth model (Liu, 2007: 6). The Solow-growth model examines the economy and its growth rates by examining and comparing results from capital accumulation, population growth and technological progress (Burda and Wyplosz 2013: 61-77). The growth phenomenon works like this: Savings accumulated from households flows into financial systems which in turn channels these savings to borrowers (Burda and Wyplosz, 2013: 61). Firms borrow these savings in the form of capital goods that will aid them in production processes (Burda and Wyplosz, 2013: 61). Assuming that the economy’s capital stock is ultimately financed by households’ savings, let us examine the economy’s Steady State when there is no population growth or technological progress involved. The Steady State below relates an economy’s
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