All of McKinsey’s published work now intrinsically accounts for the pandemic, even if it is not directly mentioned. COVID-19 news seems less urgent than at any time in the past two years. But in what is perhaps a hopeful sign, we now feel the time is right to stop. It’s painful to reflect on these 100 editions, on the millions of lives lost, the suffering and grief, and the myriad disruptions to lives and livelihoods. We did not expect to continue for more than two years, nor to ever publish briefing note #100, as we have today. Our plan was to publish an update on the virus’s implications for business for as many weeks as the news felt urgent. Thank you for reading CFI’s guide on Solow Growth Model.On March 2, 2020, just over a week before a global pandemic was declared, we published COVID-19: Briefing note #1. When saving rates are different, growth is not always higher in a country with lower initial capital stock. the Solow Growth Model does not predict absolute convergence. Along this convergence path, a poorer country grows faster.Ĭountries with different saving rates have different steady states, and they will not converge, i.e. If countries have the same g (population growth rate), s (savings rate), and d (capital depreciation rate), then they have the same steady state, so they will converge, i.e., the Solow Growth Model predicts conditional convergence. Therefore, the steady state value of capital per worker and the steady state value of output per worker are the following: In our analysis, we assume that the production function takes the following form: Y = aK bL 1-b where 0 (1 + g)k = (1 – d)k + sak bħ. Present capital stock (represented by K), future capital stock (represented by K’), the rate of capital depreciation (represented by d), and level of capital investment (represented by I) are linked through the capital accumulation equation K’= K(1-d) + I. As a result, much of the mathematical analysis of the Solow model focuses on output per worker and capital per worker instead of aggregate output and aggregate capital stock.Ĥ. Under such an assumption, if we double the level of capital stock and double the level of labor, we exactly double the level of output. The Solow Growth Model assumes that the production function exhibits constant-returns-to-scale (CRS). Therefore, the level of output (represented by Y), the level of capital (represented by K), and the level of labor (represented by L) are all linked through the production function equation Y = aF(K,L). All firms in the economy produce output using the same production technology that takes in capital and labor as inputs. If a consumer earns 100 units of output as income and the savings rate is 40%, then the consumer consumes 60 units and saves 40 units.ģ. Therefore, consumption (represented by C) and output (represented by Y) are linked through the consumption equation C= (1-s)Y. All consumers in the economy save a constant proportion, ‘s’, of their incomes and consume the rest. If the current population is 100 and its growth rate is 2%, the future population is 102.Ģ. Therefore, the current population (represented by N) and future population (represented by N’) are linked through the population growth equation N’ = N(1+g). The population grows at a constant rate g. Simplified Representation of the Solow Growth Modelīelow is a simplified representation of the Solow Model. The Solow model is the basis for the modern theory of economic growth. The Solow Growth Model, developed by Nobel Prize-winning economist Robert Solow, was the first neoclassical growth model and was built upon the Keynesian Harrod-Domar model. The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress. Updated MaWhat is the Solow Growth Model?
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