Solow Growth Model

I read the two articles on a national income growth model (called Solow model www.piketty.pse.ens.fr/files/Solow1956 ) and found some interesting things which I would explain here. The Solow’s growth model emerged in 1956 which showed that higher the rate at which a country saves the richer it will be and this relationship becomes inverse when the population growth is considered for its impact on the national income i.e. per capita (Solow, 1956), this is due to the fact that a larger population would result in a smaller portion of total National income. The article “A Contribution to the Empirics of Economic Growth” has utilized the Solow model to improve the forecasts it makes and provided a better and improved model with inclusion of the human capital in it (N. Greofory Mankiw, MAy, 1992 http://links.jstor.org/sici?sici=0033-5533%28195602%2970%3A1%3C65%3AACTTTO%3E2.0.CO%3B2-M  ). The implications of Mankiw’s article are very useful because it describes the impact of human capital in the growth model which was missing in the original Solow Growth model. The findings of Mankiw suggest that the elasticity in per capita income to the change in physical capital under this augmented model is comparable to the original Solow model which shows that the definition of the physical capital by the textbook Solow model is very much comprehensive and it doesn’t have externalities.

Mankiw improved the Solow model and displays the importance of human capital accumulation and claims that difference in income levels of different countries is due to the difference in education, savings and population growth in those countries. From these factors the original Solow model missed out the human capital accumulation which was found out to be very important in predicting the future income per capita of a country. These findings can be used by the government authorities in determining the direction of their government expenditure and taxation.

The contributions of Mankiw’s article towards the field of study are immense and it adds to the previously established knowledge i.e. Solow Growth Model and asserted that the human capital accumulation is also important in explaining the elasticity in the income per capita level to human capital accumulation which was a lacking point in the textbook Solow model. Moreover, it also provided more accurate convergence period (35 years instead of 17 years) over which the different countries with similar population growth, physical capital accumulation and education might converge in terms per capita income in 35 years. The article has shortcomings besides these factors there are also lot of contributors in the economy which have influence on the income levels like; net exports, different tax systems, different political structures and socio-cultural differences etc. Therefore, these differences can make it hard to validate the results and suggestions of the Mankiw’s Solow growth model in terms of the per capita predictions, convergence period and coefficient of the elasticity between the income per capita and the physical and human capitals.

1 comment:

Dave Tufte said...

Judy: 82/100 (for repetitive problems with definite articles, for capitalizing national inconsistently, tastes are evolving so I didn't take off for not italicizing "i.e.", for many run-on sentences).

Well, I'm primarily a macroeconomist, so I like to talk about this topic, but what does it have to do with managerial economics?

I'm not sure what Judy meant by " larger population would result in a smaller portion of total National income".

Yes, the Solow model found that growth could be increased with more saving, but the relationship is quite inelastic. So, it's not as important as people think it is.

Mankiw's inclusion of human capital is an improvement over Solow, but again the response to human capital is inelastic, so it's not as important as may people think.

Because these effects are inelastic, the implications for determining government spending and taxation are limited.

Mankiw's results do increase the time required for convergence. But it still isn't enough to explain the lack of convergence of some regions.

As to the list of other factors towards the end, the use of growth models like these have helped us more with deciding that isn't important for explaining growth differences, than explaining what is important. Currently, we're focused on what I call "low tech": differences in social and cultural institutions. It's difficult to measure this stuff, but it seems rather important for explaining growth differences.