Original Solow growth model

In 1956 Robert Solow

proposed an economic model that attempts

to explain long-run economic growth by looking at physical capital accumulation, exogenous population

growth and exogenous technological progress. It predicts that countries

reach different steady states. The higher the saving rate and the lower the

population growth rate, the richer a country is.

The underlying assumptions

of this model are: decreasing returns to K, positive diminishing marginal

products, constant returns to scale and the Inada condition. The model is based on a ?obb-Douglas production function (Y) with

two inputs, physical capital (K) and labour (L), while also considering the

level of technology (A):

Yt=Kta(AtLt)1-a

Where a is capital’s

share of income, 0 0.33; for

intermediate countries a = 0.59 ± 0.02 > 0.33; for OECD countries a = 0.36 ± 0.15 » 0.33. Therefore, original Solow

growth model is mostly incorrect. a

is…