812 WordsApr 5, 20134 Pages

“Countries grow at different rates because they accumulate capital at different rates.” Is this true? Explain your answer.
Eyeballing any cross sectional data on growth across countries shows that countries grow at different rates. Many theories try to explain this phenomenon with emphasis with capital accumulation being one of them. I will start by developing the standard neoclassical growth model as developed by Solow(1956)[1]. I will then proceed to discuss the extensions that have been made to this basic model in an attempt to better understand actual growth figures, for e.g. the standard neoclassical model cannot explain the magnitude of international differences in growth rates. Mankiw[2] points out that “the model can explain*…show more content…*

However, I=sY implying that investment is financed by savings in the economy. The growth rate of K is therefore KK=sY/K-δ. K can also be written as K=kAL and using the rules of growth rates, we can write the following; KK= kk+A/A+L/L. Denoting the rate of growth of technology A by g and rate of growth of labour by n and using the fact that KK=sY/K-δ, we can derive the growth rate of capital per effective worker as kk=sy/k-(n+g+δ) or k=sfk-n+g+δk. This is the fundamental equation of the neoclassical growth model. The economy reaches a steady state when the rate of change of capital per effective per worker equals zero. In other words, sf(k)=(n+g+δ)k. That is investment per effective worker equals the break even investment. This can be graphed as follows:
The economy reaches a steady state at k*. Any other level of capital per effective worker will result in disequilibrium and the economy will converge back to k* . For e.g., if k is below k*, the amount of k is greater than break even investment which will increase k till it reaches k*. Likewise, if k is greater than k*, then k will be lower than break even investment which will reduce k till k equals k*. Thus we can see that the steady state k* will determine the steady state level of Y and hence we derive the fact that if a country has a higher rate of investment, it will have a higher steady state level of output showing our model can explain

Related

## A Model Of Sustained Economic Growth

1720 Words | 7 Pagesintention is to develop a model where sustained economic growth is the product of the alternation of numerous agents and this literature will provide insights to reasons for variations in Gdp growth during the recessionary period(2008-2013) in Europe while investigating the optimising agents which had significant impact on Gdp growth rate. The Solow growth(1956) hypothesis looked for the determinants of sustainable economic development in per capita gross domestic product. The model recognized three principal

## Ecological Economics Vs. Neoclassical Welfare Economics Essay

2053 Words | 9 PagesEcological Economics vs Neoclassical Welfare Economics In the past, the economic school of thought regarded the resources as unlimited and focused on more production under the light of the unlimited growth assumption. Every economic action was suggested to only consider about making more profit. While the economy and the human population are growing; more natural resources are used and more pollution is observed. Human become to deal with the results of its production such as environmental problems

## The Theory Of Economic Growth Model

2281 Words | 10 Pagesnotice vast differences in average real incomes, countries’ growth records and in standards of living over times that affect living human welfare. Many model mechanisms have been used to study the worldwide growth and income differences across countries. A fundamental model that economist have used to study these issues is the Solow growth model. This essay concentrates on the analysis of this model. Firstly, the derivation of the model will be demonstrated including the needed assumptions. Then

## The Solow Swan Model : An Economic Model Of Long Run Economic Growth

980 Words | 4 PagesSolow-Swan model is an economic model of long-run economic growth in neoclassical economics. The model was developed by Robert Solow and Trevor Swan, independent of each other in 1956. This model is sometimes referred to as simply the Solow model, or the Neoclassical Growth model. The model focuses on four variables: output or GDP, capital, labor, and “knowledge”. The textbook Solow-Swan model is set in continuous time where there is no international or government trade. The Solow-Swan model is originally

## The Economic Model Growth Of Energy

1057 Words | 5 PagesEnergy is one of the main drivers of economic and social development. Years ago, the only uncertainty was the price of oil. Now the concern is if the current economic model growth is reasonable in a world with limited energy resources. This has lead to more research in other forms of resources of energy. Now we have other unconventional resources such as wind, solar, geothermal, water, and so on. Energy demand is set to double by 2050 (Beckman, 2013). Therefore, greenhouse gases could double by

## The Model Of Economic Growth

1346 Words | 6 Pagesthe Solow Model of economic growth, which assumes the neoclassic production function of decreasing returns to capital. Solow proposed the model while considers the rate of saving and population growth as exogenous and demonstrated that the countries reach the steady state level of income per capita. However, the classical Solow model is not able to explain cross-country variation in the standard of living. The Solow model predicts the effect of saving and population growth on economic growth qualitatively

## The Growth Model And Economic Growth

1072 Words | 5 PagesEndogenous growth model, it clarifies long-run economic growth as radiating from economic activities that make new technological knowledge. Endogenous growth can be explained as long-run economic growth at a rate dictated by factors that are internal to the economic framework, especially those factors administering the opportunities and motivators to create technological knowl-edge. Over the long run, the pace of economic growth, as determined by the output per individual growth rate, relies

## The Impact Of Neoclassical Economics On The Economy Essay

1344 Words | 6 PagesNeoclassical Economics is an attempt to restore some of the principles that Adam Smith, a pioneer for capitalist markets, advocated for in his Classical Economic theory. Smith suggested that minimal intervention should be required regarding government policy as the laws of supply and demand will be self-correcting. John Maynard Keynes was an important figure that worked to apply fiscal policy that would remedy an economic depression. Keynes’s idea of fiscal policy is the means by which government

## Economic Development Of China Through Marxian Economics And Neoclassical Economics

1618 Words | 7 Pagesglobalization, the economic growth of China has made the country a possible regional leader with the potential to become a global power. With respect to economics, China’s capitalist market has become a key international player in global politics. One way of conceptualizing the phenomenon of economic expansion in China is through the examination of traditional and contemporary IR theories. China’s remarkable economic growth, which exemplifies their “socialist market economy model,” can be conceptualized

## The Model Of Economic Growth

1751 Words | 8 Pages2009) with attention to the solow model and the AK model of economic growth. The differences and similarities in these growth models will be critically assessed with the use of empirical evidence to explain the real world economic growth patterns. The solow model is ‘a theory that analyses growth as being driven by exogenous technological change and the accumulation of factors of production’ (burda&wyplosz 2013 p561). ‘The AK model is an endogenous growth model it explains the sustainable by exogenous

### A Model Of Sustained Economic Growth

1720 Words | 7 Pages### Ecological Economics Vs. Neoclassical Welfare Economics Essay

2053 Words | 9 Pages### The Theory Of Economic Growth Model

2281 Words | 10 Pages### The Solow Swan Model : An Economic Model Of Long Run Economic Growth

980 Words | 4 Pages### The Economic Model Growth Of Energy

1057 Words | 5 Pages### The Model Of Economic Growth

1346 Words | 6 Pages### The Growth Model And Economic Growth

1072 Words | 5 Pages### The Impact Of Neoclassical Economics On The Economy Essay

1344 Words | 6 Pages### Economic Development Of China Through Marxian Economics And Neoclassical Economics

1618 Words | 7 Pages### The Model Of Economic Growth

1751 Words | 8 Pages