The Model Of Economic Growth Based On Production Functions

This research paper is an empirical investigation comparing the economic growth of Australia, China and the United States. It covers four topics which include the production model, the Romer model’s growth rate

The Solow Model is designed to show how the growth in the labour force, capital stock and advances in technology interact and how they affect a nations total output. The model is important for the analysis of economic growth in developing countries as it demonstrates the nature of an economy to be a key determinant of steady-state capital stock within a country. If the savings rate is high, the economy will have a large capital stock and thus high level of output and vice versa. Correspondingly changes in capital stock can lead to economic growth.

With the above established, it should now be explained what methodology will be used for the model under review as part of this research and reporting. The main thing of a statistical nature that is looked at when it comes to foreign direct investment is its impact on the economy. Since it is direct, it stands to reason that the investment will not get muddled and polluted by the path it takes into the economy. At the same time, the impact will surely not be a 1:1 situation where one dollar spent means one dollar of growth or anything else resembling that simplicity. As such, the equation and formulas used to calculate the impact of direct foreign investment will not be simple but it will not be overly complex, either (Borensztein, De Gregorio & Lee, 115-135).

The regression also seeks to control for anomalies such as those of Azerbaijan and Georgia by including the size of the industry in terms of export value (expvalT and expvalC). GDP per capita (GDPcapita), accessed from the World Bank (2015) data source, is also a control due to its ability to indicate the average wage, which is a determinant of cost competitiveness and potentially a major contributor to growth. It can also serve to measure the economic development of the nation

Robert E. Lipsey and Fredrik Sjoholm, (2004) “The Impact of Inward FDI on Host Countries: Why Such Different Answers?” pp. 23-43 [Online] Available at:

The Solow growth model was created by Robert Solow and was introduced to show how factors of production and advances in technology effect the nation’s total output. The model is made up of two components being the production and investment functions. This essay will discuss the possible effects, aspects and traits that an increase in population will have on the steady-state of the Solow growth model. This analysis will be followed by the effects of population growth on the growth rates in the model also. Paul Romer’s ideas that he has introduced to improve the Solow growth model alongside additional general elements will round the discussion to reach a conclusion involving the three elements of overall growth, limitations and Paul Romer’s ideas.

A different implication that we may also perceive from the Dixit-Norman international theory is a question—whether the international economic amalgamation will enhance and behave catalytically in the growth? Also to boil down to form a question whether the scales of production effect hold?

Amongst its functional form (the formula) this method holds a heavy advantage i.e., it does not need to refer to a particular kind of production function. Thus it is not dependent on the unrealistic assumptions on which total factor productivity is based. Furthermore, to quantify labour productivity one has not to rely on the distributive shares in output, which are strongly influenced by market power, and such a measure of productivity encompasses all kinds of technical change – embodied and disembodied (Reatti, 2001). The relative influence of these two types of technical change can be measured separately by splitting the formula of productivity of labour into its components − the degree of mechanisation (the capital/labour ratio), and the ‘productivity of

Even though knowing the production function used in a model provides plenty of useful information about the assumptions made, it does not reveal everything we need to know. In this essay, I will attempt to analyze what information is provided and what is not by the sole knowledge of the production function of the model. I will do that by studying individually each production function we discussed in class. We will make a clear distinction between models with regard to whether exogenous or endogenous technological advancement is assumed. In the first group, Solow (1956), Swan (1956), Cass (1965) and Koopmans (1965) all use the same production function, i.e. the neoclassical production function, while gradually advancing the neoclassical model

Y = AK α L 1-α (from Cobb-Douglas Production function, where Y= National Income, K=Capital, L= Labour, A= Total Factor Productivity and 0<α<1)

In all societies, economic growth is dependent on three factors, capital accumulation, population growth and technological progress. Utilising different output statistics of countries, these elements can demonstrate the country’s economic growth levels. (Alberto, Ozler, Roubini & Swagel, 1996)

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

Then the thesis uses a Cobb–Douglas production function to make empirical analyses. The thesis eventually reaches the conclusion that institutional change factor has a significant positive impact on economic growth. Gross product will increase by 0.19% when institutional factors increase by 1%. But its contribution to output is twice less than that of capital accumulation. Additionally, according to error correcting model, in short term, the institutional factor are not significant, indicating that institutional changes influence economy development through a long-term channel.

In economic literature, this model is called capital only model. Harrod and Domar (1948) took over from Rostow, because Rostow had some unanswered questions. The model stated that saving is a certain proportion of national income and net investment is defined as the change in capital stock (K). The model further assumes that there is some direct relationship between the size of the capital stock, (K), and total GNP, (Y). This follows that any addition to the capital stock in the form of new investment will bring about corresponding increase in the flow of national output, GNP. This relationship is known in economics as the capital-output ratio. If the capital-output ratio is defined as k and assume further that the national savings ratio, s, is a fixed proportion of national output (e.g. 6%) and that total new investment is determined by the level of total savings, we can construct the following simple model of economic growth Balami (2006).

Someone can notice 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 impact of a change in the saving rate on output and on consumption will be illustrated using diagrams. The primary conclusion of the Solow model is that “the accumulation of physical capital cannot account for either