Macroeconomics. The Solow model - Essay Example

The steady state condition is now that s*f(k) = (+n) * k:" (Introducing Population Growth). The Golden rule of Capital maximized the consumption at a steady state. This implies that the marginal product of capital net of depreciation must be equal to the technological progress and population hence growing for ever isn't possible without population and technological progress. The steady state is "c" and this is what is required. The values of steady state are substituted for both output. "(f(k*)) and investment which equals depreciation in steady state (k*) giving usc*=f(k*) - k*" (The Solow Model) 5.

The Solow model is very simple and it creates a link between capital-output ratio and in addition to this it also it also creates a link between investment-depreciation ratio. All this is done in a dynamic model. "The main test for any model is how well it holds up against the data. Perhaps the biggest surprise is that despite its simplicity the Solow growth model can be applied to economic data. The results have been mixed though as Acemoglu writes in an extensive review of the literature. This is not necessarily bad news, for it points at some of the other factors that contribute to economic growth and differences across countries.

One conclusion that can be drawn from the empirical literature is that cross-country differences in income per capita cannot be understood on the basis of differences in physical and human capital alone." (Solow growth Model)The economic growth is studied with this model and it has laid down a general basis for studying economic growth of an economy. The rate of capital accumulation and the rate of technological progress are two things that this model does not throw light upon and many models have been derived from the Solow model.

The world is divided into capital and labour under this model and this is how the model progresses. The firms and households are treated as constants by this and the neoclassical growth model and this is rather considered a very odd feature of this model. "Now the question some may ask is to what extent economic growth is predicated on the use of non-renewable natural resources and thereby ultimately finite. Economic growth and capitalism rely on profit and not so much on production. Therefore both capitalism and economic growth are, in theory at least, reconcilable with sustainability.

Differentiating between models of sustainable and unsustainable economic growth may be one of the greatest modelling challenges of the future." (Solow Growth Model)6. In countries like Australia and Netherlands, the growth dynamics were determined predominantly by European integration. A broader study on the effect of convergence will