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# lecture4 - Lecture 4 Assessing and Extending The Solow...

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Lecture 4 Assessing and Extending The Solow Model

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ECN/APEC 6000/7230 IV - 2 Successes of the Solow Model 1. Can account for constant growth of most developed nations during 20th Century. 2. Can explain positive correlation between saving rate and GDP per capita. 3. Can explain negative correlation between population growth and GDP per capita.
ECN/APEC 6000/7230 IV - 3 Problems for the Solow Model 1. Growth is exogenous. Growth rates differ substantially across countries. 2. Model predicts countries with same parameters should converge to same k *. 3. Saving rate is exogenous. Model cannot explain how different policies affect saving, which is a key variable.

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ECN/APEC 6000/7230 IV - 4 Cross-Country Differences in Per Capita Output In the Solow model, per capita output is Cross-country differences in per capita income must derive either from differences in Capital per effective worker, k . Technology, A . ). ( k Af L Y =
ECN/APEC 6000/7230 IV - 5 Capital Differences and Output Suppose per capita income in one country is X times as large as in a second country. Assume A is the same in both. Production is Cobb-Douglas. Let κ be the ratio of capital per worker in the two countries. α = = 1 2 k k X / 1 X =

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IV - 6 How Much Can Capital Explain? • For α = 1/3, we need κ= X 3 for capital differences alone to explain an output ratio of X . Per capita incomes (2007 PPP): US = \$46000 Uzbekistan = \$2700 Need US to have > 1000 times as much capital per worker as Uzbekistan. Actual
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lecture4 - Lecture 4 Assessing and Extending The Solow...

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