Rise of Tech: Solow Swan Flashcards
(12 cards)
Moores Law
The number of tranistors in an integrated system doubles apprx every 2 years
Key Featurs of Economic Growth (neoclassical)
Capital accumulation: drives initial growth but faces diminishing returns
Population growth: drives economic expansion but not development, as does not ensure per capita income growth
Technological progress: driver of long term economic growth
Solow Neo-Classical Growth
Capital Fundamentalism
High Investment in Capital Goods → Governments or private sectors invest heavily in infrastructure, factories, and machinery.
Increased Productivity → More capital per worker raises output per worker, (+) wages and (+) c and shifts national demand, leading to economic growth.
Diminishing Returns → Over time, without improvements in technology or human capital, additional capital has smaller effects on growth.
Economy approaches steady state
If workers lack skills (human capital) or institutions are weak (corruption, poor governance), capital investment fails to translate into higher income per capita.
Example: Many African countries received high infrastructure investment but saw limited income per capita growth due to weak institutions.
Solow Swan and Long Run Growth
The Solow-Swan Model does not provide an internal explanation for long-run economic growth—it only shows that technological progress is necessary for sustained growth, but it does not explain where technology comes from.
Ie. it provides explanation of the conditions for LR growth, but not the mechanism. It only provides the mechanism for short run changes in steady state levels of K and L.
Types of Technological Progress
Labour-augmenting Technological Progress:
Raises productivity of existing quantity of labour, on-the-job training for example.
Capital-augmenting Technological Progress:
Raises productivity of existing quantity of capital by innovation for example.
Neutral Technological Progress:
Higher output achieved with same qty/combos factor inputs.
How does the Solow model Differ from the Harrod Domar model
Harrod Domar model
(+) s -> (+) I -> (K stock) -> (+) output -> (+) income -> (+) s
Solow model includes population growth and technology
Solow Assumptions:
- Closed economy
- 2 factors of production
- Constant returns to combined K and L
- Diminishing returns individually to K and L
- pop size, participation rate and unemployment rate are all constant, thus n = constant
- Initially no tech change, and no public savings
- Private savings proportional to income
Production fn
Y(t) = f(K(t), L(t), A(t))
Initially, assume A is constant to illuminate the role of K accumulation
Steady State
Represents a long-run equilibrium where capital per worker and output per worker remain constant, ie. are growing at rate 0.
fundamental equation: kdot = s * f(k) - k(dep + n)
if I > 0, capital will accumulate and economy will grow
At steady state, kdot = 0, thus investment = capital needed per worker + depreciation of k, economy is not growing.
Characteristics of Production Function
- Constant Returns to Scale
-> allows analysis in per capita terms
-> ensures stable steady state
-> explains convergence - Diminishing returns to private inputs
- Intensive Form (per capita, used to compare)
- Inada Conditions (high marginal returns at very low capital levels, low marginal returns at very high capital levels)
- Essentiality
Middle Income Trap Reasons
Initially, rapid growth, but stagnate at middle income
-> weak institutions
-> high wages
-> lack of innovation
-> education and skills gaps
-> decline in labour intensive advantage
-> diminishing marginal returns to capital (without tech, investment in human capital, no innovation and no (+) productivity, thus no growth)
Kaldor Facts
Stable Growth in Output per Worker:
Stable Growth in Capital per Worker:
Stable Rate of Return on Capital:
Stable Capital-Output Ratio:
Stable Shares of Labor and Capital:
Variations in Growth Rates Across Countries:
