Role of savings empirical

Solow’s surprise: more than savings

  • This model most often attributed to Robert Solow (1956) – US Nobel prize winner …. but Trevor Swan (1956) (a less well known Australian economist) published (independently) a very similar paper in the same year – hence refer to Solow-Swan model

Summary of Solow-Swan

  • Solow-Swan, or neoclassical, growth model, implies countries converge to steady state GDP per worker (if no growth in technology)
  • if countries have same steady states, poorer countries grow faster and ‘converge’
  • call this classical convergence or ‘convergence to steady state in Solow model’
  • changes in savings ratio causes “level effect”, but no long run growth effect
  • higher labour force growth, ceteris paribus, implies lower GDP per worker

Limitations of Solow’s model

  • Technological progress is exogenous, it falls as manna from Heaven” (thus also called exogenous growth model)
  • How can technological progress be facilitated?
  • Is technological growth and hence economic growth sustainable?
  • The model is too optimistic in forecasting convergence among countries
  • The model does not explain lack of growth until 1800

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