3. Solow Swan Growth Model - Inside ECONOMICS Introduction...

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1 Inside ECONOMICS Introduction to Macroeconomics Solow-Swan Steady State Growth Model Introduction The Solow-Swan growth model is a dynamic model that shows the growth of capital and output per worker. It has two major outcomes. Firstly the model predicts that countries will always end up at a long run steady state of growth where the economy is growing at a constant rate. Secondly the model says that the economic growth between countries should converge. Furthermore the model predicts that as the population grows output per worker falls and as saving increases output per worker rises. Also the model says that the only way long run growth can be maintained is through increases in total factor productivity. It is important to note that an increase in saving will increase growth in the short run but eventually the growth rate will return to its long run level. Additionally at the long run steady state the economy is still growing but at a constant or steady rate. We can show the effects of an increase in saving, population and TFP by using the steady state model in the following diagrams.
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