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Solow Growth Model

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Using the Solow Growth Model describe long run growth in an economy. Explain why an economy should strive to reach its golden rule steady state level.

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This solution discusses the Solow Growth Model.

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The Solow model uses three variables (technological progress, population growth rate, and the depreciation rate) to determine the change in capital per effective worker (k). Technological progress increases the number of effective workers at rate g, growth of technology, which would cause capital per effective worker to fall at rate g. At the steady state, output per worker is constant; however total output is growing at the rate of n, the rate of population growth, and k is constant (has zero growth rate) by definition of the steady state. At steady state, MPK -d = n+ g, where MPK is the marginal product of ...

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