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Econ303 Solow Growth Model: Part Two
1
Empirical success of the Solow growth model
The Solow growth model predicts the following:
1. A country with high investment (or saving) rate enjoys high GDP per capita in the
long run.
2. Two countries with the same initial capital stock, the country with higher investment
(or saving) rate grows faster.
3. Two countries with the same saving rate, the country with lower initial capital stock
grows faster.
These predictions agree with data. The ﬁrst two scattered plots on the next page show
the positive correlation between the investment rate and GDP per capita and the positive
correlation between the investment rate and the growth rate of GDP per capita. The third
plot shows a weak negative correlation between the growth rate of GDP per capita and the
initial level of capital per capita.
A more sophisticated quantitative analysis (regression analysis) also supports the Solow
growth model. Let’s regress the average growth rate of GDP per capita on a constant, initial
level of capital per capita, and average investment rate for the period of 19601990.
Growth rate
=
constant
+
b
1
·
log(
Initial capital
) +
b
2
·
Investment rate
Below are the values of the regression coeﬃcients and how to interpret them:
1. Constant = 2.9827
The average growth rate within this group of countries is 2.98% per year.
2.
b
1
=0.4571
The negative sign means that the higher the initial level of capital is, the lower is the
growth rate. (Agrees with the Solow model) In addition to this qualitative result, it
also give a quantitative result. One percent increase of the initial per capita capital
level leads to 0.46% decrease of growth rate of GDP per capita.
3.
b
2
=0.1665
The positive sign means that higher investment rates result in higher growth rates.
(Also agrees with the Solow model) One more percent of GDP invested generates
0.17% increase of growth rate.
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View Full Document Econ303 Solow Growth Model: Part Two
2
0
0.5
1
1.5
2
x 10
4
0
5
10
15
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25
30
35
GDP per capita
Investment rate
0.1
0.05
0
0.05
0.1
0
5
10
15
20
25
30
35
GDP growth rate
0.02
0
0.02
0.04
0.06
0.08
4
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10
11
Initital capital
GDP growth rate
0
0.5
1
1.5
2
x 10
4
0
1
2
3
4
GDP per capita
Population growth rate
Furthermore, the eﬀect of initial capital suggests that poorer countries should grow faster
than richer ones. Eventually the poor will catch up and all countries go to the same steady
state. This is called the convergence result of the Solow model.
If we look at economies that are close to each other and are linked with free factor mobility,
such as 50 states in the US, prefectures in Japan and even a group of western European
countries, this is an accurate picture of what happened.
If we look at broader sets of countries, for example US and India, we do not observe the
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This note was uploaded on 12/06/2010 for the course ECON 3020 taught by Professor Williamson during the Spring '10 term at FSU.
 Spring '10
 Williamson
 Macroeconomics

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