Steady State and Convergence: Solow Growth Model

I show the steady state of the Solow Growth model graphically. I then explain what these graphs mean, and discuss convergence. The speed of convergence does vary depending on the level of capital per capita.

There is a slight inaccuracy where I state that convergence is quicker the further away from the steady state we are. This is not necessarily true for when we have a lower level of capital per capita than the steady state. The speed of convergence is given by the distance between the depreciation and investment curves. Thus, clearly when we are near zero capital per capita, the speed of convergence is very slow.

I give an introduction to the Solow Growth model. This video explains the basics of the Solow Growth model, giving a description of what the model does, and the assumptions it makes. I also derive some initial equations that are useful in finding the outcomes of the model.

Here's a basic summary of the assumptions we make in the previous video to get you up to speed:

The Solow model is a basic theory of economic growth. It introduces the theory of capital accumulation to the classical production function. This is thus a neoclassical model. It is thus also sometimes named the neoclassical growth model, or the Solow-Swan Growth model. This is usually the second model of economic growth that is covered in an intermediate macroeconomics course, after the classical model. Solow endogenises the capital stock, by assuming that we have some depreciation of capital which decreases the capital stock. We have that investment increases the capital stock. These two facts can be combined to give us the law of motion of capital. I also derive the fundamental equation of the Solow Growth model.
The Solow model is a key model to learn as it is widely used in economic policy-making. It is also used as a benchmark for other growth theories, to evaluate their performance against empirical findings.

I discuss the notation and assumptions.

Future videos will look at deriving the steady state of the Solow model, looking at Solow model dynamics and more. For example, we can use this model to look at instantaneous impacts of a shock to population, or a shock to the population growth rate. The model can also examine shocks to the productivity parameter (or the technological progress parameter).

The model looks at the impact of capital accumulation on savings, consumption and output. we can use per capita or aggregate variables. This gives the basics in a more general sense. With given values of the savings rate and so on, we can get actual values of output per capita. The basic form of the Solow model has a number of shortcomings as shown by empirical data, but we can augment this model with additional features such as human capital in order to better replicate the true characteristics of an economy. The model does well in predicting conditional convergence, but absolute convergence is not seen in reality.

The Solow Growth can be attributed to Solow (1956)
Robert M. Solow, A Contribution to the Theory of Economic Growth, The Quarterly Journal of Economics, Volume 70, Issue 1, February 1956, Pages 65–94

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