Solow–Swan model

• https://en.wikipedia.org/wiki/Solow–Swan_model

Macroeconomics, Cobb Douglas production function

It describes the total production $Y(t)$ in terms of capital ($K$), labor ($L$), and “knowledge” or “ideas” ($A$).

$$Y(t)=K(t)^{\alpha}(A(t) L(t))^{1-\alpha}$$

This operates under the following assumptions. - The production is sub-linear to the factors due to the law of diminishing return.
- You can invest some fraction of total production back to capital and labor. - A constant fraction of capital and labor depreciates.

Because of the diminishing return and constant investment & depreciation, the growth is capped under a constant $A$. Also, low-production countries can grow much faster (catching-up growth) than high-production countries. The advanced countries can still grow by increasing $A$, the “ideas”, which makes capital and labor more efficient at production and pushes the stationary point further up.

Ideas are nonrivalrous, which means they can be used by many without diminishing the value.

Lectures

• https://mru.org/courses/principles-economics-macroeconomics/solow-model-economic-growth (https://www.youtube.com/watch?v=eVAS-t83Tx0)

Criticisms

• Luigi Pasinetti’s Critique of the Solow Growth Model

Related articles

• What the Solow Model can teach us about China by Noah Smith (writer)