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Solow Growth Model

## Assumptions of the Solow Growth Model

The Solow Growth Model is identified as an exogenous model in economic growth. This model is usually essential in analyzing changes in the outputs levels in an economy over a while. The changes in economic growth mainly occur due to the change in the savings rate, the rate of technological progress, and the population growth rate. In other words, the changes are recognized as a result of a change in socio-economic factors of a population, which inter a business from realizing the product preferences. The Solow Growth Model was developed by a Nobel Prize-winning economist Professor R.M Solow.  He was the first person to build the neoclassical growth model upon the Harrod – Domar model.

The Professor R.M. Solow model was mainly built on economic growth as an alternative to the Harrod- Domar line of thought.  The model was created with the fact of being crucial in the assumptions of fixing the proportions in production (Alatas, 2021). Using this economic growth model mostly postulates a continuous production meaning in linking the outputs to the labor and capital inputs, which are regarded as substitutable in nature. The assumptions of the Solow Growth Model show that the model usually has a technical coefficient as there would be a tendency for capital and labor ratio. They are both adjusted through time to attain the direction of the equilibrium ratio. For instance, when the balance of capital to labor will be more, the output and capital will have to grow slower than the labor force and vice versa. The analysis of the Solow Growth Model is more convergent to the equilibrium path to start up with any ratio for capital and labor.
In analyzing the Solow Growth Model, it takes much consideration on the outputs. In the economy, the annual rate of production is titled Y (t). This mainly represents the primary income of the society. Based on the production, apart is consumed initially, and the rest has to be invested and saved. The saved proposition is constant, and the saving rate is sY(t). The stocking

capital is K (t). Through the investment process, the stock capital is mainly increased as it is identified as;  K = sY …. (1)

The output has to be produced with the technological, labor, and production function identifying capital possibilities.   Y=F (K,L) …(2)

During the transitional dynamics, Solow Growth Model usually plays a significant role in that process (Borges, et al., 2020). In explaining the growth, the standard Solow Growth Model has to predict that two countries will have a different y* as they differ in s, d, or n. this will mainly mean that there will be no growth occurring in the outputs per person in the long run and due to this growth will only have to occur during transitions to the steady-state (Paudel, 2020). In addition, the growth rate will have to slow down as the countries will continue to be more developed.

In interpreting the results in the transitional dynamics, some principles have to be considered. According to the principle of the transition dynamics, Solow Model states that an economy known to start below the steady has to grow rapidly to reach its steady-state in the long run. In the process of approaching the steady-state, the rate of growth will have to diminish.  Below is a graph showing the prediction of how Solow Growth Model will have to appear in transitional dynamics.

The Solow Growth Model usually has its prediction, which facilitates in coming up with a conclusion. In the long run, a Standard Solow Growth Model usually predicts that economies have to converge regardless of the state’s equilibrium (Zheng & Wang, 2021). Also, it predicts that for permanent growth to be identified or achieved, the technology must play a significant role in its progression process (Burkhanov, 2020). Through this model, it is recognized that the poor countries are developing faster and eventually compared to the rich countries. In other words, the poor countries will have to grow at high speed; hence in the long run, they will have to catch up with the more affluent nations.

Moreover, according to the prediction, developing countries can grow faster than rich countries can be identified as an absolute convergence. For instance, when the rich and the poor countries have the same parameters, they can be recognized as having a clear path for growth. The Solow Growth Model will only have to predict a development if the two countries are different in terms of technology (Suripto, et al., 2020). Therefore according to this model, an economy has to keep increasing as its saving rates will temporarily have to experience a faster growth rate. Researchers have also identified that poor countries have the power of growing faster than rich countries.

Conclusion:

The Solow Growth Model is identified to signify that the accumulation of physical capital cannot predict a vast growth in a period.  It cannot access the growth over time in the outputs per person and the capital accumulation in the long run to the extent that it will have improved technology.