Dealing with solow model

July 17, mnmecon Leave a comment The idea of an economy reaching steady state is central to the Solow growth model. The reason this happens in the Solow model is because of the concept of depreciation in capital accumulation. The rate at which capital depreciates is usually modelled as being constant.

Dealing with solow model

Order now Mishkin defines macroeconomics as the study of economic activity and prices in the overall economy of a nation or a region. In macroeconomics economic theories are utilised to elucidate particular economic phenomena and the theory involves some economic models.

Dealing with solow model

Macroeconomics focuses on three data series which are the real GDP, unemployment rate and inflation rate. Focusing on GDP the gross domestic product it has emerged as the single most renowned economic indicator for government policies and businessman.

Wenzelp 61 defines GDP as the measure of the size of an economy as captured by the market value for all final goods and services sold within a given period of time.

As it compounds a whole sphere of economic activity in a single number and can be decomposed in its contributing parts, it is an invaluable measure of aggregate production that proofs extremely valuable for extracting specific information about the activities in a particular sector.

Further, the GDP is the broadest measure of income existing and has the noble features of being easily quantifiable, internationally standardised and above all readily available relatively consistency for all countries.

As the world population continues to grow geometrically great pressure is being placed on available resources and the environment is getting strained. Hence this has led some different policies to be applied in various countries to manage the population growths.

Population growth increases demand, however, it also floods the labour force with excess employees thereby depressing wages and increasing poverty hence the GDP is affected unfavourably. The following essay seeks to exhibit the Solow growth model graphically and empirically which according to Mishkin the Solow model articulates how saving rates and population growth determine accumulation which in turn affects economic growth.

A Solow system

This model also postulates that GDP is produced according to an aggregate production function technology. The model is built on three blocks which are production function, investment function and capital accumulation.

The study of the essay aims to depict the relationship between GDP and population growth thus how increases and decreases in population affect the GDP per capita. Trend line was computed using statistical software.

The raw data for the above countries is on the appendix. This also articulates that there are more countries with high population and have low GDP as compared to countries with low population growth which have high GDP per capita.

The country in the graph above which is Kenya has a relatively high population growth of 3. This is also indicated in KenyanInformationGuide. This has resulted in overpopulation in major cities and scarcity of jobs. According to Mishkin the Solow model suggests that an increase in population growth shifts the depreciation and capital dilution upwards.

This is due to the fact that in Kenya a lot of people are not educated so their usage of capital leads to faster depreciation and since there are many their number would not be toning with the available capital hence dilution is enhanced. This is also expressed on Figure A which is graphically: For the steady state to occur investment has to be equal to depreciation.

This is also graphically shown on Figure B that investment should be equal to depreciation Figure BThe Solow Diagram [pic] On the graph Iraq has a population growth of 2. The International Monetary Fund also estimates that the effects of the UN sanctions have begun to fade thus the emigration of middle class has slowed.

These factors mentioned have been catalytic to the increase in population hence affecting GDP.

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Since Iraq depends on the oil sector the population of young people has been an adverse effect since they are not skilled to operate hence a faster rate of depreciation on the available income hence a low GDP per capita enhanced. More so these countries with high population do not have room for technological advancement as there would be more people to take care of hence no improvements are made on the technological sector.

This hence creates capital dilution which is shown on Figure A thus lowering the level of GDP per capita in overall. More so many countries like Kenya and Iraq have had changed demographic structures, with an increasing number of retirees relative to workers who are in their prime saving years Projectsyndicate.

Again these countries have a lot of people who are uneducated who are more interested in current consumption and less interested in the future hence affecting the GDP per capita adversely.

In particular, it exudes that economies that have a higher stock of capital per worker because in the past they have saved more and a lower population growth rate will exhibit a higher level of output per capita in steady state equilibrium.

These countries have policies which enhance low population for example in Macao there is one child policy which is being permitted by the government and the birth rate has been decreasing hence low population.

Again in these countries there are high sanitary and health standards producing high life expectancy. This therefore keeps the capital per worker at a steady state as the workforce is fit for productivity in the countries Indexmundi.

According to Mishkin the Solow model exudes that the country with high savings has high GDP per capita and Japan has high savings and investments rates, has a well educated and industries workforce, intensive promotion of industrial development and foreign trade produced a mature industrial economy Japantoday.

However on the other hand Saudi Arabia has high population growth and high level of GDP per capita which does not commensurate with what the Solow model proposes.

As graphically shown in figure 1 Saudi Arabia has a population growth of 3. According to the International Monetary Fund.

In Saudi Arabia there is petroleum production and high population and this enhances greater exports which lead to high GDP. This differs from the Solow model because no capital dilution takes place regardless of an alarming population growth. Further, there is Timor — Lister which has a population of 1.EC Notes, (Karl Whelan) 1 Topic 1: The Solow Model of Economic Growth Macroeconomics is not a one-size- ts-all type of eld.

Dealing with solow model

It would be a duanting task to even. Neoclassical growth: Solow's model is a neoclassical model of growth. It comes in response to the Harrod-Domar model and tries to explain that in the long run, growth is . Free Essay Samples. Main Menu. Free Essay Samples; About Us; Login; Hire Writer; Contact Us.

The Solow–Swan model is an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity.

A Solow system Social Security is a hybrid between a pay-as-you-go and an advance-funded pension system, with most benefits paid out of current taxes but some potentially paid out of trust fund savings. Unlike the Solow model as we typically set it up with labor-augmenting technological progress, productivity tis called the Solow residual.

Let's write % A tin terms of what we can measure: % A t= % Y t [ % K which should hold if we are dealing with data on .

Solow Model | mnmeconomics