How does the Solow growth model predict growth in the long term?
There is no growth in the long term. If countries have the same g (population growth rate), s (savings rate), and d (capital depreciation rate), then they have the same steady state, so they will converge, i.e., the Solow Growth Model predicts conditional convergence. Along this convergence path, a poorer country grows faster.
How does the Solow model predict convergence?
The Solow model makes the prediction that whether economies converge depends on why they differed in the first place. On the one hand, if two economies with the same steady state had started off with different stocks of capital then we would expect them to converge.
Does the model predict conditional convergence?
In other words, the model predicts conditional convergence in the sense that a lower starting value of real per capita income tends to generate a higher per capita growth rate, once we control for the determinants of the steady state. As of now we have assumed that the technology has been constant over time.
What factors affect the applicability of the Solow model?
The third factor affecting the applicability of the Solow model is its predictions about convergence. The Solow model is essentially a closed economy model. But convergence is a natural outcome of the growth process only in a globalised world with perfect capital mobility.
What is the prediction of the Solow model in convergence of countries?
If countries differ in the fundamental characteristics, the Solow model predicts conditional convergence. This means that standards of living will converge only within groups of countries having similar characteristics.
Does the Solow model predict absolute convergence?
In accordance with the absolute convergence hypothesis, the Solow-Swan model would predict that these two nations would subsequently grow faster than other industrialized countries in the immediate post-war period -- as indeed they did.
How does the Solow model predict convergence What is the evidence on this prediction?
The Solow model makes the prediction that whether economies converge depends on why they differed in the first place. On the one hand, if two economies with the same steady state had started off with different stocks of capital then we would expect them to converge.
What does the Solow growth model predict?
The Solow model predicts that a policy of encouraging growth through more capital accumulation will tend to tail off over time producing a once-off increase in output per worker. In contrast, a policy that promotes the growth rate of TFP can lead to a sustained higher growth rate of output per worker.
What does absolute convergence mean in economics?
Absolute convergence is the idea that the output per capita of developing countries will match developed countries, regardless of their specific characteristics. This argument builds on the fact that developing countries have a lower ratio of capital per worker compared to developed countries.
What is growth convergence?
The basic idea of convergence in growth rates among countries is that if regions are similar in structural parameters such as preferences and technology, then poor regions will tend to grow faster than rich ones [17].
What does the convergence hypothesis help explain?
The idea of convergence in economics (also sometimes known as the catch-up effect) is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies, and in the Solow growth model, economic growth is driven by the accumulation of physical capital until this optimum ...
What is convergence theory?
Concept description. Ashley Crossman (reference below) describes convergence theory as the presumption that “as nations move from the early stages of industrialization toward becoming fully industrialized, they begin to resemble other industrialized societies in terms of societal norms and technology.”
What are the two types of convergence in economics?
The neoclassical model predicts two types of convergence: absolute and conditional. Absolute convergence implies that developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output.
Does economic growth imply convergence in income per capita?
The catch-up effect is a theory that all economies will eventually converge in terms of per capita income, due to the observation that underdeveloped economies tend to grow more rapidly than wealthier economies. In other words, the less wealthy economies will literally "catch-up" to the more robust economies.
What are the main components of the Solow growth model?
The model takes as given (exogenous) the investment rate; the depreciation rate; and the growth rates of the workforce, human capital, and technology.
Which of the following are an implication of the Solow growth model?
Three main implications follow from this result: (1) the steady-state output is constant, i.e., the growth rate is zero; (2) short-run growth is only transitional growth; and (3) countries with similar characteristics, mainly f(.), will converge to the same steady-state (it's also possible to have a weaker-condition of ...
What is the difference between absolute and conditional convergence as predicted by the neoclassical growth model?
Conditional convergence implies that a country or a region is converging to its own steady state while the unconditional convergence (absolute convergence) implies that all countries or regions are converging to a common steady state potential level of income.
What is absolute and conditional convergence?
"Absolute convergence" means a series will converge even when you take the absolute value of each term, while "Conditional convergence" means the series converges but not absolutely.
What are the two types of convergence in economics?
The neoclassical model predicts two types of convergence: absolute and conditional. Absolute convergence implies that developing countries, regardless of their particular characteristics, will eventually catch up with the developed countries and match them in per capita output.
What is convergence theory?
Concept description. Ashley Crossman (reference below) describes convergence theory as the presumption that “as nations move from the early stages of industrialization toward becoming fully industrialized, they begin to resemble other industrialized societies in terms of societal norms and technology.”
What is the second prediction of the Solow model?
The second important prediction of the Solow model is that there is lack of symmetry in the effect of technological progress on factor prices. This is why we find diverse behaviour of factor prices in steady state. While in the steady state the real wage grows at the rate of technological progress, the real rental price of capital remains constant over time. These predictions have come true in case of USA.
What are the implications of the Solow model?
Economists feel uncomfortable with at least three implications of the Solow model. First, there is the question of exogeneity of technological progress. It augments labour productivity but is completely exogenous to the economy. An economy can do nothing to accelerate its long run rate of economic growth. Secondly, if technical progress occurs ...
What is the third factor affecting the applicability of the Solow model?
The third factor affecting the applicability of the Solow model is its predictions about convergence. The Solow model is essentially a closed economy model. But convergence is a natural outcome of the growth process only in a globalised world with perfect capital mobility. Thus convergence is possible if economies are opened up ...
What happens to capital in the Solow model?
In the Solow model if capital is free to move across countries then it will flow from countries with low rates of return to capital (rich countries) to countries with higher rates of return (poor countries). This implies that most capital should move from rich to poor nations.
Which model predicts that whether economies converge depends on why they differed in the first place?
The Solow model makes the prediction that whether economies converge depends on why they differed in the first place.
What is the rate of growth of the Tiger economies?
However, the spectacular growth of the Tiger economies at the rate of 1% per annum cannot be properly explained by the Solow model in which technology grows at a constant exogenous rate.
What did the authors find after making corrections for differences in national saving rate and population growth rates?
After making corrections for differences in national saving rate and population growth rates they found strong tendencies for countries with the same characteristics to converge.
What is the absolute convergence hypothesis?
The absolute convergence hypothesis, posits the following: consider a group of countries, all of which have have access to the same technology ( ¦ (ï½·)), the same population growth rate (n) and the same savings propensity (s), and only differ in terms of their initial capital-labor ratio, k. Then, we should expect all countries to converge to the same steady-state capital-labor ratio, output per capita and consumption per capita ( k*, y*, c*) and, of course, the same growth rate (n).
What is conditional convergence?
The conditional convergence hypothesis states that if countries possess the same technological possibilities and population growth rates but differ in savings propensities and initial capital-labor ratio, then there should still be convergence to the same growth rate, but just not necessarily at the same capital-labor ratio. This is due to the paradox of savings outlined above. In short, the conditional convergence hypothesis asserts that countries can differ in the their steady-state ratios (e.g. k 1 * vs. k 2 * in Figure 2 below) and thus differ in consumption per capita, but as long as they have the same population growth rate, n, then all their level variables -- capital, output, consumption, etc. -- will eventually grow at that same rate.
What are the two versions of the Solow Swan model?
There are two versions of this. the absolute convergence and the conditional convergence hypotheses.
Why does the conditional convergence hypothesis not hold?
Of course, even the conditional convergence hypothesis should not necessarily hold when comparing the industrialized world with the underdeveloped world because the population growth rates between countries in these two groups are different (Denmark vs. Mozambique again). But the conditional convergence hypothesis ought to help explain why countries with similar population growth rates (e.g. India and Nigeria) can converge to the same growth rates, albeit with different steady-state capital-labor ratios, and thus different income/consumption per capita.
Solving The Solow Growth Model
Implications of The Solow Growth Model
- There is no growth in the long term. If countries have the same g (population growth rate), s (savings rate), and d (capital depreciation rate), then they have the same steady state, so they will converge, i.e., the Solow Growth Model predicts conditional convergence. Along this convergence path, a poorer country grows faster. Countries with differ...
Additional Resources
- Thank you for reading CFI’s guide on Solow Growth Model. To keep learning and advancing your career, the following resources will be helpful: 1. Economic Indicators 2. Gini Coefficient 3. Human Development Index 4. Marginal Propensity to Consume