The Model Of Economic Growth

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The authors have studied the 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 but not quantitatively .The authors have augmented the Solow model with accumulation of Human capital as well as physical capital. The authors have analyzed empirical data of year1965-1985 with the textbook Solow model & augmented Solow Model for three different samples including Non-oil, Intermediate and OECD. The authors demonstrated that augmented Solow model is still valid to explain the international variation in income per capita. The authors advocate the conditional convergence hypothesis, where per capita incomes of countries which have similar economic conditions converge to one another in the long-run independently of their initial condition. The authors propose that convergence cannot be expected in the Solow growth model because different countries reach different steady rates. Non-convergence can be attributed to the different steady rates of the countries which is determined by the accumulation of human and physical capital and
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