Solow's model

Solow's neoclassical growth theory is the cornerstone of modern growth theory. The Solow model describes a perfectly competitive economy, growth of capital and labor inputs causing growth of output, and a neoclassical production function that determines the diminishing marginal output of capital when the supply of labor is constant.

This production function, combined with the assumptions of a constant savings rate, a constant rate of population growth, and a constant rate of technological progress, forms a complete general dynamic equilibrium model. The Solow model emphasizes the scarcity of resources and the limits of growth brought about by the mere accumulation of physical capital, and the steady state zero growth under the conditions of constant population growth rate and constant technological progress is the embodiment of this idea.

Expanded Information:

Significance

1. He used a continuum production function in his analysis of economic growth used a continuous production function, which has since been called the neoclassical production function.

2. The assumption of mutual substitutability between labor and capital makes the process of economic growth adjustable, thus the theoretical model is closer to reality.

3, the long-term growth rate is determined by the increase in labor force and technological progress, the former not only refers to the increase in the number of labor force, but also contains the quality of labor force and technological capabilities.

Solo's long-term growth model breaks with the theory that "capital accumulation is the most important factor in economic growth" and shows that long-term economic growth depends on technological progress, education and training, in addition to capital.

Baidu Encyclopedia - Solow's Model of Economic Growth