Economic Growth : Solow Model

The technical progress as residue: Solow model

Robert Solow was the first to propose a formal model of growth. Inspired by the neoclassical model is based on a production function with two factors: labor and capital. The production results exclusively on the development in combination with a certain amount of capital (inputs) and work (labor).

The Solow model is based on the assumption that factors of production are experiencing diminishing returns, that is to say that increasing them in a certain proportion results in an increase in a smaller proportion of production . It is also assumed that the factors of production are used effectively by all countries. In asking that the population is experiencing a growth rate that Solow describes as "natural" (not influenced by the economy), the model deduced three predictions:

• Increase the amount of capital (that is to say invest) increases growth: with a larger capital, labor productivity increases (called apparent).
• Poor countries have a growth rate higher than rich countries. They have indeed accumulated less capital, and thus aware of diminishing returns lower, that is to say that any increase in capital leads to an increased production proportionally greater than in rich countries.
• Because of diminishing returns to factors of production, economies will reach a point where any increase in factors of production no longer results in increased production. This corresponds to the steady state. Solow notes, however, that this third prediction is unrealistic: in fact, the savings never reach this stage, because of technical progress which increases the productivity of factors.