Solow Model

The Solow Growth Model

Reading:

Romer, Chapter 1; Robert E. Lucas Jr., “Why Doesn’t Capital Flow from Rich to Poor Countries?” AER Papers and Proceedings, 92-96, 1990; Martin Feldstein and Charles Horioka, “Domestic Savings and International Capital Flows,” Economic Journal, 314-329, 1980. Mankiw, Romer and Weil. “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics 107 (2), 1992, 407-437.

Stylized Facts of Economic Growth

Little growth in per-capita output before the Industrial Revolution: technological progress and productivity gains translated into population growth rather than output growth; most people attained little more than subsistence income throughout most of human history. Average growth in GDP per capita: 0% in Western Europe and India during the first millenium, 0.14% in Western Europe and 0.02% in India between 1000 and 1820. Population growth was similarly 0% during the first millenium and 0.2% in Western Europe and 0.13% in India between 1000 and 1820 [Maddison, 2001]. World population grew on average less than 0.1% per year between 1 and 1750 [Livi-Baci, A Concise History of World Population, Blackwell, 1997]. Rapid growth in output and standard of living since the Industrial Revolution: per-capita incomes increased 50-300 fold in Western Europe and the US during the past 200 years. The Great Divergence: little difference in per capita incomes across countries until the Industrial Revolution, on-going divergence since then. The ratio between per capita incomes in the richest regions (US, Canada and New Zealand) and the poorest ones (Africa) was 3 in 1820; this ratio has increased to 20 by 1998 [Maddison, 2001]. By the end of the first millenium, China and India were both richer and more technologically advanced then Europe. By 1700, the core areas of Europe and Asia had similar consumption levels and overall wellbeing. Subsequently, Industrial Revolution took place in Europe whose growth has far outpaced that of...