chapter 1 the solow growth model -...

Chapter 1THE SOLOW GROWTH MODEL

1.1 Theories of Economic GrowthStandards of living differ among parts of the world by amounts that almostdefy comprehension. Although precise comparisons are difficult, the bestavailable estimates suggest that average real incomes in such countries asthe United States, Germany, and Japan exceed those in such countries asBangladesh and Zaire by a factor of twenty or more. There are also largedifferences in co'Untries' growth records. Some countries, such as South Ko-rea, Turkey, and Israel, appear to be making the transition to membershipin the group of relatively wealthy industrialized economies. Others, includ-iilg many in South America and sub-Saharan Africa, have difficulty simplyin obtaining positive growth rates of real income per person. Finally, we seevast differences in standards of living over time: the world is much richertoday than it was three hundred years ago, or even fifty years ago.

The implications of these differences in standards of living for humanwelfare are enormous. The real income differences across countries are as-sociated with large differences in nutrition, literacy, infant mortality, lifeexpectancy, and other direct measures of well-being. And@e welfare con-

of effects of the short-run'

examples are even more.LULVJ.JJL<= per person continues to grow at its postwar

rate of 1.3 percent per year, it will take about two hundred yearsIndian real incomes to reach the current U.S. level. If India achieves 3

nI>T'r"",t- growth, the process will take less than one hundred years. And if itJapan's average growth rate, 5.5 percent, the time will be reduced

only fifty years. To quote Robert Lucas (1988), "Once one starts to thinkt [economic growth], it is hard to think about anything else."

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