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Introduction
The essay focuses on the Solow growth model and how the steady growth in the model is impacted by the population growth in an economy. The essay also focuses on the improvements suggested by Paul Romer to the Solow growth model.
In the view of Solow (1956), the Solow growth model is one of the models that focus on capital accumulation in the solely production economies. The model assumes that every person in the economy works full time and there is no choice available to them for labor / leisure. The model does not take prices.Critical Evaluation of Solow Growth Model
In an economy into account due to the fact that Solow model is interested in output and income only. In support to these findings, Solow (1994) state that the Solow model also focuses on how savings in an economy impact the output and productivity in a given economy as there is a significant relationship between these relationships in economics.
The Solow growth model, Steady state of the Model and impacts of Population growth
According to Durlauf, Kourtellos and Minkin (2001), the previous models including closed economy model provide a static view to the economy as it shows the economy at a given point of time. However, the Solow growth model is quite different as it provides a active view of how savings and investment can impact productivity, output and an economy as a whole.Critical Evaluation of Solow Growth Model
The Solow model considers only endogenous factors and the model considers only labor and capital as endogenous factors. With the assumption that the labor has to work full time, the model is dependent on capital per worker only (Solow, 2000). The equations below show the illustration of this relationship:
Y = f (K,L)
We multiply each variable by 1/L and we get:
Or
This is the final equation of Solow model, which shows that the output per worker is dependent on the capital per worker only. As the capital invested per worker increases, the output per worker also increases; this is what the equation simply indicates. The relationship is shown in the graph below:
Figure 1 – Output in Solow Growth Model
The MPK indicates the marginal product of capital which is the slope of the curve and is equal to the change in output divided by change in labor. MPK indicates the rate of change in output per worker that results from the change in capital per worker by a certain amount (Durlauf, Kourtellos and Minkin, 2001). According to Solow (2000), the Solow growth model assumes that the investment is only possible by saving more.
Therefore, greater savings lead to the investment and demand within an economy. Whenever the investment increases, it is known as appreciation and when the investment declines, it is known as depreciation in investment.Critical Evaluation of Solow Growth Model
Generally, the higher amount of investment leads to higher amount of output given that there is no or lower depreciation.
In the view of Solow (2000), an important concept in the Solow growth model is the steady growth level in the model. The steady state is defined as the capital stock where the capital depreciation outsets the capital appreciation (investment) in an economy; these two are equal.Critical Evaluation of Solow Growth Model.
It is the assumption that the capital stock of country does not change after reaching a certain level where the investment and depreciation equal. The capital investment in an economy keeps changing until the capital reaches that specific level.
Durlauf, Kourtellos and Minkin (2001) further explain this concept, it is stated that the steady state of the model is achieved when the output equals the equilibrium output and the economy is able to invest the amount to set off the depreciation in the production economy.
In this case, the output remains constant over the periods with constant capital stock in the economy. It is further discussed that the output will decline if the capital is increased than the level of the steady state.
Therefore, the economists in the economy must be cautious while investing in the capital for a country. The golden rule level of capital consumption is a type of steady state when the consumption in the economy is maximized.
It is discussed that if the government wants to move steady state to a new level, they would change it to a level where the consumption in the economy is maximized.
It is possible when the savings rate in the economy changes and the government can change the saving rate to a golden level if the MPK is equal to the rate of depreciation in the economy (Romer and Chow, 1996). The illustration of the steady state is shown in the figure below:
Figure 2 – Steady State of Solow Growth Model
The steady state of Solow growth model is achieved when the capital reaches the level of K*; the difference between capital appreciation and depreciation is zero. The illustration of golden rule is shown in the figure below:
Figure 3 – Golden Rule level of Capital Consumption
According to Romer and Chow (1996), the Solow growth model assumes that all the population of a country is working; therefore, the labor supply of a country increases whenever there is an increase in population.
It is also assumed that all the population works full-time and is not given option to have leisure. Considering this assumption, the population growth plays a significant role in an economy as prescribed by Solow growth model.
It is believed that the economic growth among the counties vary due to the difference in population growth among those countries. As the Solow growth model considers the output per worker and capital per worker, therefore, it is possible that the output per worker might decline despite having an increase in capital. It is possible in the case when the population increase is higher than the increase in the investment (Solow, 1994).
In the view of Kremer (1993), the Solow growth model can calculate the population i.e. labor supply in an economy by knowing the population in current year and the expected growth rate in population for a country.
In accordance with Kremer (1993), there will be difference in the growth in output of two countries when there is only difference in the population of these two economies keeping all other factors identical. In the given case, the economy with lower population growth will have the higher economic growth in comparison to the economy with higher population…
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