Macroeconomics (Fourth Edition)
Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 5, Problem 1RQ
To determine

The mechanism that generates the growth in Solow model.

Expert Solution & Answer
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Explanation of Solution

The growth of the economy takes place along with the growth of productivity and output. The mechanism that generates the growth can be summarized as the capital accumulation. The capital accumulation increases the productivity and efficiency of an economy. This mechanism is appealing due to the fact that the machines are capable of continuous working with the programmed manner. This helps to deliver the higher output and longer working hours compared to the manual labor. Thus, the mechanism that generates the growth in the Solow model is capital accumulation and capitalism.

The capital depreciates at constant rate means that it is the issue that the firm faces in the short run. The capital stock does not keep growing due to the fact that there is capital depreciation. As bigger and bigger the capital gets, it becomes harder to produce higher output in the economy, which keeps the economy growing is known as the diminishing returns to scale. These two are the main factors that prevent the capital from providing the growth in the long run.

Economics Concept Introduction

Economic growth: Economic growth is the increase in the output of goods and services produced per head of the population over a period of time in an economy.

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