Solow Growth Model Solow's Growth Model Posits Essay

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Solow Growth Model

Solow's Growth Model posits that growth is due to capital accumulation. This implies a few things: that growth is strongest when countries begin acquiring capital, and then moves towards an equilibrium point. Nations go through the path of development until they roughly reach the point where they enjoy the same standard of living as industrialized nations -- something that happened with Japan and is on the verge of happening in a few other Asian nations like Korea, Taiwan and Singapore (Gahagan, n.d.). The model is as follows:

Q = A Ka L. b

Critical to the model is the role of multifactor productivity. The Solow Growth Model argues that capital accumulation combines with productivity to deliver growth. Thus, either capital accumulation or an increase in multifactor productivity can result in growth. The model also assumes that productivity being equal, an increase in labor will yield diminishing returns -- that capital and productivity are more important factors.

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This does not imply that an increase in labor will have a detrimental impact on the economy, just the that impact of increased labor diminishes as the increase becomes larger.

The model has a number of implications for policies regarding liberalization. For the most part, the model argues that liberalization is beneficial for an economy. Consider the impacts of liberalization. One of the first things to be liberalized, among nations engaging in the liberalization process, is capital. Liberalization of capital flows encourages foreign direct investment. Solow's model argues that by increasing capital stock, a nation can increase its production. In addition to liberalizing capital flows in order to attract more FDI, nations will also benefit from liberalization in other areas of the economy. This implies privatization, it implies the removal of bureaucratic layers and it implies liberalizing the economy from as much government intervention as possible.

It is worth noting that Solow's model does not include the….....

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