Countries grow at different rates because they accumulate capital at different rates
“Countries grow at different rates because they accumulate capital at different rates.” Is this true? Explain your answer.
Since the Industrial Revolution, economists have attempted to explain why certain countries economies grow at greater rates than others. The post-Keynesian era saw the introduction of the Harrod-Domar model of economic growth. This model explained an economy’s growth rate by observing the level of saving and productivity of capital in the economy. The neo-classical Solow-Swann model, however, superseded this, as claims of instability in the solution of the Harrod-Domar model arose. On top of analyzing an economy in terms of it’s capital stock and productivity, the Solow Swann model took labour input into account as well. Both models, however, concluded that countries that were able to accumulate capital at greater rates than others generally saw faster growth rates up until their steady state was reached.
Solow (1956) introduced his version of the neoclassical theory of growth using the production function Y=F(K,AL), where Y is output, K is capital, L is labour, and A is a measure of the level of technology. AL can be seen as the labor force measured in efficiency units, which incorporates both the amount of labor and the productivity of labor as determined by the available technology. Assuming the production function has constant returns to scale, we can write the production function as y=f(k) where y=Y/AL, k=K/AL and f(k)=F(k,1). This production function relates output per effective worker to the amount of capital per effective worker. Ultimately, the neoclassical model emphasizes how growth arises from the accumulation of capital. The capital stock per effective worker, k, evolves according to: dk/dt=sf(k)-(n+g+δ)k, where s is the rate of saving, n is the rate of population growth, g is the rate of growth in technology, δ is the rate at which capital depreciates and dk/dt resembles the change in capital over time t.
The law of motion of
Since the Industrial Revolution, economists have attempted to explain why certain countries economies grow at greater rates than others. The post-Keynesian era saw the introduction of the Harrod-Domar model of economic growth. This model explained an economy’s growth rate by observing the level of saving and productivity of capital in the economy. The neo-classical Solow-Swann model, however, superseded this, as claims of instability in the solution of the Harrod-Domar model arose. On top of analyzing an economy in terms of it’s capital stock and productivity, the Solow Swann model took labour input into account as well. Both models, however, concluded that countries that were able to accumulate capital at greater rates than others generally saw faster growth rates up until their steady state was reached.
Solow (1956) introduced his version of the neoclassical theory of growth using the production function Y=F(K,AL), where Y is output, K is capital, L is labour, and A is a measure of the level of technology. AL can be seen as the labor force measured in efficiency units, which incorporates both the amount of labor and the productivity of labor as determined by the available technology. Assuming the production function has constant returns to scale, we can write the production function as y=f(k) where y=Y/AL, k=K/AL and f(k)=F(k,1). This production function relates output per effective worker to the amount of capital per effective worker. Ultimately, the neoclassical model emphasizes how growth arises from the accumulation of capital. The capital stock per effective worker, k, evolves according to: dk/dt=sf(k)-(n+g+δ)k, where s is the rate of saving, n is the rate of population growth, g is the rate of growth in technology, δ is the rate at which capital depreciates and dk/dt resembles the change in capital over time t.
The law of motion of