Dealing with Solow Model

Topics: Economic growth, Economics, Macroeconomics Pages: 9 (2038 words) Published: August 21, 2013

Mishkin (2012) defines macroeconomics as the study of economic activity and prices in the overall economy of a nation or a region. In macroeconomics economic theories are utilised to elucidate particular economic phenomena and the 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 exhibit the Solow growth model graphically and empirically which according to Mishkin (2012) the Solow model articulates how saving rates and population growth determine accumulation which in turn affects economic growth. This model also postulates that GDP is produced according to an aggregate production function technology. The model is built on three blocks which are production function, investment function and capital accumulation. The study of the essay aims to depict the relationship between GDP and population growth thus how increases and decreases in population affect the GDP per capita. MAIN DISCUSSION

Figure 1

NB: Trend line was computed using statistical software.
The raw data for the above countries is on the appendix. The horizontal axis (x-axis) has the population growth 1960- 2010 The vertical axis (y-axis) has the GDP per capita 2010

The graph above exhibits various countries from six continents namely Western Asia, South Asia, South East Asia, Latin America and Africa with their GDP per capita of the year 2010. There is a negative linear relationship on the graph with a trend line of y= -9969.7x + 32595 exuding the fact that as the population of a country increases the GDP per capita increases. This also articulates that there are more countries with high population and have low GDP as compared to countries with low population growth which have high GDP per capita.

According to Mishkin (2012, p 160) the Solow model articulates that high population growth lowers the average person’s standard of living since the economy will have more workers with the same amount of capital, each worker has less capital with which to work. The country in the graph above which is Kenya has a relatively high population growth of 3.22% and the GDP per capita of $1689. This is also indicated in (2011) that Kenya has a population which is higher than the world’s average of 1.2% especially in urban areas due to people who migrate in search for jobs and better standards of living. This has resulted in overpopulation in major cities and scarcity of jobs. According to Mishkin (2012) the Solow model suggests that an increase in population growth shifts the depreciation and capital dilution...
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