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ECON3102-005Chapter 7: The Solow Growth Model
and Growth Convergence
Neha Bairoliya
Spring 2014
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The Solow Growth Model
The Solow growth model is a good model to explain growth as itreplicates the patterns we see in real-world data.
• There is sustained growth over time.
• There is a positive correlation between the rate of investment andoutput per worker across countries.
• There is a negative correlation between the population growth rateand output per worker across countries.
![Page 3: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/3.jpg)
The Solow Growth Model
The Solow growth model is a good model to explain growth as itreplicates the patterns we see in real-world data.
• There is sustained growth over time.
• There is a positive correlation between the rate of investment andoutput per worker across countries.
• There is a negative correlation between the population growth rateand output per worker across countries.
![Page 4: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/4.jpg)
The Solow Growth Model
The Solow growth model is a good model to explain growth as itreplicates the patterns we see in real-world data.
• There is sustained growth over time.
• There is a positive correlation between the rate of investment andoutput per worker across countries.
• There is a negative correlation between the population growth rateand output per worker across countries.
![Page 5: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/5.jpg)
The Solow Growth Model
The Solow growth model is a good model to explain growth as itreplicates the patterns we see in real-world data.
• There is sustained growth over time.
• There is a positive correlation between the rate of investment andoutput per worker across countries.
• There is a negative correlation between the population growth rateand output per worker across countries.
![Page 6: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/6.jpg)
The Solow Growth Model
In the end, we concluded that neither increases in savings nor reductionsin the population growth rate were good enough to justify continuousgrowth over time.
• We concluded that total factor productivity (technological progress)was the one that allowed us to grow over time.
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The Solow Growth Model
In the end, we concluded that neither increases in savings nor reductionsin the population growth rate were good enough to justify continuousgrowth over time.
• We concluded that total factor productivity (technological progress)was the one that allowed us to grow over time.
![Page 8: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/8.jpg)
Convergence
• Is there a tendency for poor countries to catch up with the rich?
• The Solow growth model says “yes”.
• Assumptions:
• We have two identical countries (same TFP, labor force growth rate,and savings rate).
• The “rich” country initially has a higher level of capital per workerrelative to the “poor” country (consequently a higher output perworker).
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Convergence
• Is there a tendency for poor countries to catch up with the rich?
• The Solow growth model says “yes”.
• Assumptions:
• We have two identical countries (same TFP, labor force growth rate,and savings rate).
• The “rich” country initially has a higher level of capital per workerrelative to the “poor” country (consequently a higher output perworker).
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Convergence
• Is there a tendency for poor countries to catch up with the rich?
• The Solow growth model says “yes”.
• Assumptions:
• We have two identical countries (same TFP, labor force growth rate,and savings rate).
• The “rich” country initially has a higher level of capital per workerrelative to the “poor” country (consequently a higher output perworker).
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Convergence
• Is there a tendency for poor countries to catch up with the rich?
• The Solow growth model says “yes”.
• Assumptions:• We have two identical countries (same TFP, labor force growth rate,
and savings rate).
• The “rich” country initially has a higher level of capital per workerrelative to the “poor” country (consequently a higher output perworker).
![Page 12: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/12.jpg)
Convergence
• Is there a tendency for poor countries to catch up with the rich?
• The Solow growth model says “yes”.
• Assumptions:• We have two identical countries (same TFP, labor force growth rate,
and savings rate).• The “rich” country initially has a higher level of capital per worker
relative to the “poor” country (consequently a higher output perworker).
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Convergence occurs in the model.
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Convergence does not occur across allcountries.
We would like to see a negative correlation so that poor countries aregrowing faster than rich countries, thus catching up.
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Convergence occurs among rich countries tosome extent.
We would like to see a negative correlation so that poor countries aregrowing faster than rich countries, thus catching up.
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Convergence does not occur among poorcountries.
We would like to see a negative correlation so that poor countries aregrowing faster than rich countries, thus catching up.
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Why could this happen?
The most obvious reason is to claim that countries do not have access tothe same technology, so our assumptions do not hold.
• Think of government intervention. For example, laws that giveunions bargaining power and thus could make firms unable (or evenfearful) of introducing new technologies which are not “approved”by unions.
• Think again of government intervention. For example, barriers tointernational trade to “protect” the domestic industry, which alsowon’t allow the domestic industry to get technologies from abroad.
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Why could this happen?
The most obvious reason is to claim that countries do not have access tothe same technology, so our assumptions do not hold.
• Think of government intervention. For example, laws that giveunions bargaining power and thus could make firms unable (or evenfearful) of introducing new technologies which are not “approved”by unions.
• Think again of government intervention. For example, barriers tointernational trade to “protect” the domestic industry, which alsowon’t allow the domestic industry to get technologies from abroad.
![Page 19: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/19.jpg)
Why could this happen?
The most obvious reason is to claim that countries do not have access tothe same technology, so our assumptions do not hold.
• Think of government intervention. For example, laws that giveunions bargaining power and thus could make firms unable (or evenfearful) of introducing new technologies which are not “approved”by unions.
• Think again of government intervention. For example, barriers tointernational trade to “protect” the domestic industry, which alsowon’t allow the domestic industry to get technologies from abroad.
![Page 20: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/20.jpg)
If this is the case,TFPs for different countries are no longer the same, and we have multiplesteady states across a sample of countries:
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So, are poor countries doomed?
Not exactly: the government could
• promote greater competition among firms: absence of monopoliescreates the incentive to innovate. (Do not confuse with the R&D /patent monopolies)
• promote free trade
• do selection privatization: eliminate government ownership whenthere is no clear benefit of having a public enterprise instead of aprivate one.
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So, are poor countries doomed?
Not exactly: the government could
• promote greater competition among firms: absence of monopoliescreates the incentive to innovate. (Do not confuse with the R&D /patent monopolies)
• promote free trade
• do selection privatization: eliminate government ownership whenthere is no clear benefit of having a public enterprise instead of aprivate one.
![Page 23: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/23.jpg)
So, are poor countries doomed?
Not exactly: the government could
• promote greater competition among firms: absence of monopoliescreates the incentive to innovate. (Do not confuse with the R&D /patent monopolies)
• promote free trade
• do selection privatization: eliminate government ownership whenthere is no clear benefit of having a public enterprise instead of aprivate one.
![Page 24: ECON3102-005 Chapter 7: The Solow Growth Model and …](https://reader036.vdocument.in/reader036/viewer/2022062522/62b3ad8cc2da63777006337a/html5/thumbnails/24.jpg)
So, are poor countries doomed?
Not exactly: the government could
• promote greater competition among firms: absence of monopoliescreates the incentive to innovate. (Do not confuse with the R&D /patent monopolies)
• promote free trade
• do selection privatization: eliminate government ownership whenthere is no clear benefit of having a public enterprise instead of aprivate one.