Solow Growth Model Essay Example | Topics and Well Written Essays - 1500 words

Solow proceeds Model - Essay ExampleSolow Growth Model is a standard neoclassical ideal of economic egression developed by Robert Solow. This ensample holds that economic growth is linked to heavy(p) accumulation and the people growth (Zhuang and St Juliana, 2010, p. 65). Solow growth poser postulates that chthonian equilibrium, the level of per capita income is determined by prevailing technology, order of saving, rate of people growth and technical keep all which be assumed exogenous (Barossi-Filho, 2005, p. 37). Given that the rates of population growth and levels of saving argon varying across countries, the model gives testable predictions on assessing how the two can influence economic growth of countries. Solow model has been criticized by different theorists given the assumptions made by this theory. This paper will explain the impacts of both population growth and addition in the saving rates upon economic growth. Moreover, the paper will explain how Solow model accounts for technological progress and assess whether Romer model improves on this. Impact of both population growth and an increase in the nest egg rate upon economic growth Increased end product of goods and services leads to economic growth. In the light of this statement, any country that desires to achieve economic growth must have optimal factors of production (Song, 2009, p. 7). The factors of production include seat of government, intentness, technology, land and entrepreneur. When these factors are optimized economic growth of the country will be positive. Solow growth model predicts that economic growth results from accumulation of capital and population growth rate (Zhuang and St Juliana, 2010, p. 65). Moreover, the model starts by making an assumption of capital accumulation is subject to diminishing returns (Stein, 2007, p. 193). Solow model argues that developing countries with low capital stock can achieve steeper economic growth compared to developed countries by increasing their savings and investment rates. Solow model postulates that increased rates of savings leads to capital accumulation. The theory behind increased savings resulting in capital accumulation is that higher savings leads increased amount of funds that can be offered as credit for capital investment. Consequently, this borrowed capital will be invested in the production industry and hence the gross domestic products will be higher (Song, 2009, p. 9). Investment is need for the development of infrastructure required for production. However, Liu and Guo (2002, p. 25) argues that economic growth of a country depends on its ability to deploy the savings to finance capital investment. In the Solow model, the second factor identified to influence economic growth of a country is its population growth. Population provides an important factor of production labor and consequently as population grows it adds to the available labor it contributes to economic growth of any countr y. However, given the rule of diminishing returns on factors of production it is necessary to belabor equilibrium between the labor and other factors of production (Song, 2009, p. 10). The combined effect of impact of increased rates of saving and population growth can be understood using the Solow model. This model offers testable predictions since these two factors are different across nations. Song (2009, p. 9) argues that countries having high saving levels usually have higher per capita incomes while those experiencing high population growth have lower per capita inco