- Solow growth model
- The Solow growth model explains output per worker by capital per worker, which rises when investment exceeds what is needed to replace worn-out capital and equip new workers.
- Capital deepening
- Capital deepening is a rise in the amount of physical or human capital that each worker has to work with.
Three ideas that decide how rich a country ends up
Can you name the three ideas the Solow model uses to say how rich a country ends up?
At A-level, investment shifts LRAS to the right. The Solow model asks how far that can go: whether building ever more capital can keep a country growing.
Diminishing returns to capital means that, with technology held constant, each extra amount of capital per worker adds less to output per worker than the amount before.
Can you think of an example?
Give a builder with only a shovel a digger and her output leaps. Give her a second digger and it barely moves, because she can drive only one at a time.
The steady state is the level of capital per worker at which investment exactly covers worn-out capital and new workers, so capital and output per worker stop changing.
Can you think of an example?
An economy invests exactly what it needs to replace machines that wear out and to equip each new worker it adds. Capital per worker stays put, and so does output per worker.
Conditional convergence is the prediction that a country grows faster the further it sits below its own steady state, which saving, population growth and technology set.
Can you think of an example?
After the Second World War the poorer countries of Western Europe, starting with little capital per worker, grew faster than their richer neighbours and closed much of the gap.