Solow Model Essay

3106 Words Jan 19th, 2013 13 Pages
What are the main limitations of the Solow model? Discuss with reference to theory and evidence.

The Solow Model, also known as the neoclassical growth model or exogenous growth model is a neoclassical attempt created in the mid twentieth century, to explain long run economic growth by examining productivity, technological progress, capital accumulation and population growth. This model was contributed to by the works of Robert Solow, in his essay ‘A Contribution to the Theory of Economic Growth’ and by Trevor Swan in his work, ‘Economic Growth and Capital Accumulation’, both published in 1956. The model is perceived to be an extension of the 1946 Harrod-Domar model, which Solow (1956) describes as a ‘model of long-run growth which
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In this Cobb-Douglas production function, α is the elasticity of Y with respect to K, and (1-α) is the elasticity of Y with respect to L.

Therefore, if we rearrange the function in respect to one unit of labour, we will end up with the equation below where y is Y/L and k is K/L.

The diagrammatic illustration of the Solow Model is shown below.

Fig. 2

Another way of explaining this curve is states that the rate of change of capital stock per unit labour is the difference between actual investment and Break-even investment shown in the diagram below.

Fig.3

The two lines cross at k* where both investments are equal.

Determining Economic Growth in the Solow Model:
The first part of this essay has introduced the Solow Model and set out the assumptions of the model and its diagrammatic representation. This essay will now focus on the determinants of economic growth within the model and then outline the limitations of the model whilst drawing parallels between the two. The essay will also refer to the assumptions of the model it self when discussing its limitations.

The first reason for growth in the model is when an economy is in disequilibrium i.e. the supply of capital is not equal to the demand for capital.
The first part of this essay has introduced the Solow Model and set out the assumptions of the model and its diagrammatic representation. This essay will now focus on the determinants of

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