eco 301.docx - ECO301 Solow Growth Model Economics are a...

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ECO 301 12/16/14 Solow Growth Model Economics are a huge part of every person’s life, as obvious as this statement might be, it is very much true. Not everyone realizes how important economics are, from what people earn, to what they purchase, how much they get to save and the capital they own, these are just few examples of the power economic policies have over people. But how exactly does the economy make our lives better or worse? Many economists have tried to answer this question over time, classical thinkers such as John Smith, Thomas Malthus and David Ricardo, as well as one of the most famous neoclassical economists Robert Solow. These men looked at what was going on around them, by observing the society they lived in, they came to their conclusions, most of which differ, but nonetheless make very good points. In order to understand how different the views of John Smith, Thomas Malthus and David Ricardo are from those of Robert Solow it seems fitting to talk about his ideas and the Solow Growth Model first. Solow concentrated on finding a good way to explain the long-run economic growth, which it turn would show why some nation’s GDP (gross domestic product), grows, while other countries’ GDP stays the same. Solow’s Growth Model “… is designed to show how the growth in the capital stock, growth in the labor force, and advances in technology interact in an economy as well as how they affect a nation’s total output of goods and services.” In his model Solow looked at the rate of saving, how it determined the size of the capital stock, and how it increased production, which in effect increased the output. But at some point the growth stops and steady state is reached, this is where innovations in technology happens. “The higher the rate of population growth, the lower the steady state levels of capital per worker and
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output per worker.” and that is where technology comes to play, new technology increases the production function, which in turn allows for the economy to grow.
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