Augmented Solow Growth Model
The augmented Solow model was proposed by Mankiw, Rower and Weil (MRW) in their treatise “A Contribution to the empirics of Economic Growth”. To better explain the variation in living standards across regions, they propose a model that adds human capital accounting for the fact that labor across different economies can possess different levels of education. To test this model, a proxy variable in the form of human capital accumulation is added as an explanatory variable in the cross-country regression. MRW find that human capital accumulation is directly correlated with savings and population growth and the inclusion of human capital lowers the impact of savings and population. MRW claim that by testing the data, they find that this model accounts for 80% of the cross country income variance [cross–section regression of the 1985 level of output per worker for 98 countries producing an R² of 0.78 ]

The model also predicts that poor countries are likely to have higher returns to human capital. The incorporation of human capital has the ability to tweak the theoretical modeling and the empirical analysis of economic growth. The theoretical impact will be based on the restructuring of growth process ideology. MRW quote Lucas (1988) stating that although there exist decreasing returns to physical capital accumulation when human capital is held constant, the returns to all reproducible capital (human and physical) are constant. The empirical analysis will be altered as human capital will be included as a variable in the regression to explain differences in economic growth.

Adding human capital to the production function, the augmented Solow equation becomes

Y(t) = K(t) ∂H(t) β(A(t) L(t))1−∂− β

(human capital H, physical capital K, labor L and knowledge or technology ): One significant assumption here is that human capital depreciates at the same rate as physical capital as its production function is considered similar to...

...Solowmodel - how well it holds in the real world?
Prepared by:-
Amol Rattan (75013)
Introduction
Prior to SolowModel, Harrod Domar model had shown how the savings rate could play a crucial role in determining the Long run rate of Growth. Solowmodel however proved a result that was contrary to what Harrod Domarmodel had predicted.
It showed that savings has only level effect on income and the growth rate of income depends upon the rate of efficiency or technical progress in the country.
SolowModel relies on certain assumptions
1. There are constant returns to Scale(CRS)
2. The production function is standard neoclassical production function with diminishing returns to factor
3. The markets are perfectly competitive
4. Households save at a constant savings rate ‘s’
Equilibrium in SolowModel is defined as the steady state level of capital where the economy grows at a constant rate. By assuming that the two factors of production are capital and labour per efficiency unit, it can be shown that savings only affects the level of per capita income. It is only the rate of growth of efficiency which determines the rate of growth of per capita output.
For production...

...
The SolowGrowthModel
Economics 202
14 April 2014
Statement on plagiarism: I understand that plagiarism is a serious offence and confirm that unless otherwise acknowledged the content of this essay is my own.
Economic growth rates across countries are hardly ever the same and the Solow-growthmodel is the starting point at determining whygrowth rates differ across countries (Burda and Wyplosz, 2013: 61). This essay aims at examining the aspects of the Solow-Growthmodel of economic growth while highlighting the strengths and weaknesses and identifying whether or not capital accumulation has been the main cause for economic growth in South Africa. This will be achieved through examining economic growth with capital-stock growth, population growth and technological progress.
The Solow-growthmodel measures growth rates of different economies and according to Solow, it is the starting point to determining why these growth rates differ across economies (Burda and Wyplosz, 2013). The Solow-growthmodel is an exogenous growthmodel which means variables are...

...limitations of the Solowmodel? Discuss with reference to theory and evidence.
The SolowModel, also known as the neoclassical growthmodel or exogenous growthmodel is a neoclassical attempt created in the mid twentieth century, to explain long run economic growth by examining productivity, technological progress, capital accumulation and populationgrowth. 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 accepts all the Harrod-Domar assumptions except that of fixed proportions.’ Instead Solow (1956) supposes that a ‘single composite commodity is produced by labour and capital under the standard neoclassical conditions.’ This notion will be elaborated on further in the course of this essay. Economists today use the Solowmodel source of growth accounting to estimate the individual effects on economic growth of capital, labour and...

...Growth Accounting
The Solowgrowthmodel presents a theoretical framework for understanding the sources of economic growth, and the consequences for long-run growth of changes in the economic environment and in economic policy. But suppose that we wish to examine economic growth in a freer framework, without necessarily being bound to adopt in advance the conclusions of our economic theories. In order to conduct such a less theory-bound analysis, economists have built up an alternative framework called growth accounting to obtain a different perspective on the sources of economic growth. We start with a production function that tells us what output Yt will be at some particular time t as a function of the economy’s stock of capital Kt, its labor force Lt, and the economy’s total factor productivity At. The Cobb-Douglas form of the production function is: Yt = At × ( Kt ) (Lt )
α 1− α
If output changes, it can only be because the economy’s capital stock, its labor force, or its level of total factor productivity changes.
Changes in Capital
Consider, first, the effect on output of a change in the capital stock from its current value Kt to a value Kt + ∆K—an increase in the capital stock by a proportional amount ∆K/Kt. In this production function Kt is raised to a power, α, so we can apply our rule-of-thumb for the proportional...

...population growth rate of 1% per year. The per-worker production function is
y = 6k.5,
where y is output per worker and k is capital per worker. The depreciation rate of capital is 14% per year. Households consume 90% of their income and save the remaining 10% of it. There is no government.
(a) What is the steady state in this economy?
Answer:
(a) In steady state, sf(k) ’ (n + d)k
0.1 ( 6k.5 ’ (0.01 + 0.14)k
0.6k.5 ’ 0.15k
0.6 / 0.15 ’ k / k.5
4 ’ k.5
k ’ 42 ’ 16 ’ capital per worker
y ’ 6k.5 ’ 6 ( 4 ’ 24 ’ output per worker
c ’ .9 y ’ .9 ( 24 ’ 21.6 ’ consumption per worker
(n + d)k ’ .15 ( 16 ’ 2.4 ’ investment per worker
(b) Suppose the government wants to double the steady state value of output per person by using policies to change the saving rate. What policies the government can use? What value of the saving rate the government needs to reach? Calculate it and show in the diagram the effect of such change.
Answer:
(b) To get y ’ 2 ( 24 ’ 48, since y ’ 6k.5, then
48 ’ 6k.5,
so k.5 ’ 8, so k ’ 64.
The capital-labor ratio would need to increase from 16 to 64. To get k ’ 64, since sf(k) ’ (n + d)k,
s ( 48 ’ .15 ( 64,
so s ’ .2. Saving per worker would need to double.
[pic]
Problem 2.
According to Solowmodel, what happens with consumption per worker in the long run, if
a) a portion of nation’s capital stock is destroyed because of war
b) energy prices permanently...

...theory involves some economic models. Macroeconomics focuses on three data series which are the real GDP, unemployment rate and inflation rate.
Focusing on GDP the gross domestic product it has emerged as the single most renowned economic indicator for government policies and businessman. Wenzel (2009, p 61) defines GDP as the measure of the size of an economy as captured by the market value for all final goods and services sold within a given period of time. As it compounds a whole sphere of economic activity in a single number and can be decomposed in its contributing parts, it is an invaluable measure of aggregate production that proofs extremely valuable for extracting specific information about the activities in a particular sector. Further, the GDP is the broadest measure of income existing and has the noble features of being easily quantifiable, internationally standardised and above all readily available relatively consistency for all countries.
As the world population continues to grow geometrically great pressure is being placed on available resources and the environment is getting strained. Hence this has led some different policies to be applied in various countries to manage the population growths. Population growth increases demand, however, it also floods the labour force with excess employees thereby depressing wages and increasing poverty hence the GDP is affected unfavourably.
The following essay seeks to...

...Run—The SolowModel
Guillem Riambau. EC 202, Fall 2011
1
Motivation
The SolowModel is one of the fundamental blocks of this course and of
macroeconomic theory in general. The fact that Robert Solow, the man
who developed the model in the mid-ﬁfties, won the Nobel Prize in 1987
tells for the signiﬁcance of the model.
The goal of this model is to tell what factors contribute to long-run
economic growth and how they contribute to it. In the previous lecture, we
have seen what questions are posed by the economists when they talk about
the growth. Why do economies grow over time? Why are people richer
in one country than in the other? What helps some countries develop at
very high rates? The SolowModel is good at providing us with answers for
questions like these.
2
2.1
Basic Model
Set-up
Before we start, it should be noted that SolowModel is dynamic; it shows
how output and other variables evolve through time, and it is important to
know the values of variables at diﬀerent points in time. For this reason, we
will have time subscript for the variables: for example, Yt stands for the
output Y produced in the year t. We assume that economy starts at some
initial period t = 0 and lives for an inﬁnite number of periods t = 0, 1, 2, ......

...Macroeconomics Essay: “Countries grow at different rates because they accumulate capital at different rates.” Is this true?
The Neoclassical growthmodel is a framework which we can use to attempt to explain how economic growth behaves. It much simplified model which attempts to explain long run economic growth by looking at capital accumulation, population growth and increases in technical progress. We will use the neoclassical model to explain how countries grow, by using the fundamental equation kdot= sf (k) – (n+g+d) k, where k dot is the differential of k with respect to t. The equation shows us how for countries not in the steady state how capital accumulation affects growth and that eventually all countries converge to the steady state. Then once a country has reached its steady state it will be shown that capital accumulation no longer affects economic growth.
Looking at the fundamental equation of the neoclassical growthmodel kdot= sf (k) – (n+g+d) k. It is from this equation that we can see if a country invests more than the break even investment, then kdot increases, i.e. they accumulate capital, and if a country invests less than the break even investment then kdot decreases. The equations shows that all countries will converge to a steady state when investment per effective worker is equal to the...