Solow-Swan Economic Growth Model

A Solow-Swan Economic Growth Model is an exogenous economic growth model that explains long-run economic growth by examining capital accumulation, labor or population growth, and productivity increases largely driven by technological progress.

• Context:
  • It can have been developed independently by Robert Solow and Trevor Swan in 1956; this model is foundational in macroeconomics for its explanation of how these factors interact over time to influence growth.
  • It can describe how economies converge to a steady-state growth path determined by the rates of savings, population growth, and technological progress.
  • It can utilize an aggregate production function, often of the Cobb–Douglas production function type, to model the relationship between inputs (capital and labor) and output.
  • It can highlight the importance of technological progress as an exogenous factor driving long-term economic growth.
  • It can include other economic dynamics, such as human capital accumulation or policy interventions.
  • It can serve as a basis for various extensions, including the Ramsey–Cass–Koopmans Model, which endogenizes the saving rate by modeling consumer optimization.
  • It can be used to analyze the impact of different savings and population growth rates on an economy's long-term growth.
  • It can be applied in policy analysis to understand the effects of investment in technology and capital on economic growth.
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• Example(s):
  • One that assumes a constant rate of technological progress and exogenous population growth to explain steady-state growth.
  • A Ramsey-Cass-Koopmans model (a Ramsey growth model), which incorporates consumer optimization to endogenize the savings rate.
  • A Mankiw-Romer-Weil model, which adds human capital accumulation to the basic Solow-Swan framework.
  • One that is augmented with exogenous human capital accumulation, where the growth of human capital (e.g. through education) is determined outside the model.
  • An extension incorporating exogenous natural resources, where the discovery and depletion of key resources like oil reserves affects long-run growth but is taken as given by the model.
  • A multi-sector Solow-Swan model with exogenous structural change, where the relative growth of different economic sectors (e.g. agriculture vs industry) is an outside driver shaping the overall growth path.
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• Counter-Example(s):
  • Endogenous Growth Models, such as the Romer model, which attribute economic growth to internal factors like innovation and knowledge accumulation.
  • Harrod-Domar Model, which emphasizes the role of capital accumulation but does not account for technological progress or steady-state growth.
• See: Ramsey–Cass–Koopmans Model, Capital Accumulation, Population Growth, Worker Productivity, Technological Progress, Production Function, Cobb–Douglas Production Function.

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References

2024

• (Wikipedia, 2024) ⇒ https://en.wikipedia.org/wiki/Solow–Swan_model Retrieved:2024-6-5.
  • The Solow–Swan model or exogenous growth model is an economic model of long-run economic growth. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largely driven by technological progress. At its core, it is an aggregate production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics". The model was developed independently by Robert Solow and Trevor Swan in 1956, and superseded the Keynesian Harrod–Domar model. Mathematically, the Solow–Swan model is a nonlinear system consisting of a single ordinary differential equation that models the evolution of the per capita stock of capital. Due to its particularly attractive mathematical characteristics, Solow–Swan proved to be a convenient starting point for various extensions. For instance, in 1965, David Cass and Tjalling Koopmans integrated Frank Ramsey's analysis of consumer optimization, thereby endogenizing the saving rate, to create what is now known as the Ramsey–Cass–Koopmans model.

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