Solow Model

Countries only differ from one another along one single dimension: capital/worker.

Assumptions

  • Production function is the same.
    • Labour is constant.

  Equations

  • Δk=γf(k)-δk where i=γy (i.e. fraction of gdp invested) and d=δk (which is the fraction of depreciation)
  • Steady states
    • γ_ss=A(k_ss)^α=A^(1/1-α)(γ/δ)^(α/(1-α))

capital = f(investment)=f(savings)=f(poverty?

Evaluation

  • Theory of income differences - taken alone, and assuming similar technology levels, Solow model has only limited explanatory power with a correlation of 0.17.
  • Why investment differ? Although international flows matter, savings matter more.

Implications

  • Theory of relative growth rates - convergence to steady state (at a decreasing rate)
    1. 2 countries have same γ but different y, country with lower y will have higher growth.
    2. 2 countries have same y but different γ then higher γ higher growth
    3. If a country increases its level of investment it will increase its rate of income growth.