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Solow Economic Model - Essay Example

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An essay "Solow Economic Model" claims that the varying capital output and capital-labor ratios allow increased capital intensity, well distinguished from technological innovation. The Solow model neglects the temporary slides of the business cycle and predicts the potential income basis…
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Solow Economic Model

Download file to see previous pages... The graph on the right side is the representation of Solow's Economic model, where the characteristic parameter of production factor curves, an output is the function of labor and capital stock. The initial model keeps the labor force at a restricted level. Solow model is based on many other limitations, therefore it cannot be termed as a generalized model.
1. Surprisingly the rate of long-term return is determined beyond the parameters of the model. It is assumed the economy converges towards steady-state growth rate, which is dependent upon the rate of technological progress and growth rate of the labor force. The key prediction of Solow Model is that ultimately the economy of the poor countries will saturate with the economy of the rich countries. The results of such models have been practically validated on the average basis. Considering the economy of former poor country Japan, the Japanese economy has converged with the economy of rich nations, the convergent growth rates are still expected, even after the reaching point of convergence; leading to overflow of positive investment. Another example is of convergence within countries. In case of United States, the income levels of the Southern states of United States have tended to converge to the economic level of Northern states. The reliance of economic model on technological progress is another subject of criticism, had the productivity level is dependent upon the development in technological front, a significant rise in productivity would have been observed, but certainly there has been no economic revolution due to technological boom. The example of East Asian countries supports the claim, though the economies have risen significantly none of their rapid growth had been due to rising per capita productivity. ...Download file to see next pagesRead More
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