Essay: Critical Evaluation of Solow Growth Model

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Introduction

Critical Evaluation of Solow Growth Model, 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), Critical Evaluation of Solow Growth Model 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 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. 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, Critical Evaluation of Solow Growth Model 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…