Solow Growth Model


Robert Solow contributed immensely to the theory of economic growth. The article provides a basic overview of Solow’s model of growth and development. Again the version avoids the use of large mathematical functions that may be difficult for somebody to understand. Solow Won a Nobel Prize in 1987 and has spent most of his career teaching on the essential aspects of economic growth through carefully elaborating on the underlying categories. Solow explained how critical management information technology is. Notably, Solow unbundled economic growth into its constituent parts namely: capital, labor, and ideas or new technology. Solow’s model provides a clear picture of economic growth scenario by explaining how much growth accounted from capital input. And how much of that growth came from more people working or people who are working more extended hours and how much of that growth came from innovation that sounds pretty simple but until the solo model in the mid-1950s it had never been appropriately done before in the context of developing nations. Therefore according to Solow model growth was a collective product of three factors capital, labor, and new technology. For example in developing countries when people move from rural areas to cities and start working in factories, they produce more, and this causes economic growth. However, there a limit to growth that relies on labor because there reaches a time when all people have moved to cities and no additional labor this create a decline in production. Consequently, economies should make a paradigm shift of labor-intensive output to growth that relies more on new technology and ideas.

Solow residual is a critical feature in Solow model which translates to catch up growth, and this occurs when between rich and developing country, the developing country’s economy may appear to increase as compared to a rich country. The scenario is due to the developing country’s lack of so many important things; thus return on invested capital tend to be high. For example, a first road built to the city brings high value, because there are not many roads and capital stock is low.  The road has a high rate of marginal return on capital and this according to the Solow model spurs rapid growth. The road accumulates capital and brings high value in related use. The road becomes a major transit for economic activities and operations. If another road is built in the countryside, it delivers some value but has a lower marginal value that constructing the first major road to the city. Such a scenario is called diminishing marginal returns of capital, and as economies become wealthier, they experience diminishing marginal returns on their capital. Solow predicted future convergence of development levels among countries of the world as developing countries‘ catch up’ with more prosperous countries. Solow asserts that God did not intend that some countries in the world be more prosperous than others and that soon the more impoverished nation will quickly catch up with more affluent counterparts. For instance, Japan and Germany suffered great destruction after a second world war, and as they started rebuilding factories and constructing roads and other facilities destroyed they experienced an extremely high return on capital invested. Due to diminishing marginal returns of capital developed nations should undergo constant growth since this situation temporarily puts a limit on developed economies.

Finally, prosperity without growth refers to a form of development that aims to improve living standards without exploitation. Even though it’s difficult to achieve this prosperity there are approaches if adopted can bring such prosperity for example socialism etc.