Solow Swan model

The SolowSwan model gives prominence to saving, investment and the capital
stock; these all have large parts to play in determining an economys long-run
evolution, the model has very little to say about total factor productivity.
But, as you will see, without changes in total factor productivity, economic growth,
because of the nature of capital and production, is destined to come to an end.
Technological progress, then, becomes the all-important factor promoting continued
long-run growth.
Solow Swan Model
We now turn to a famous model in economics, the neo-classical growth model.
This model predicts the existence of a positive relation between a countrys
preparedness to put aside current resources for the purposes of saving and
investment and its long-run per capita GDP.
We begin with a standard production function y = Af(k,l).

Per capita GDP therefore will depend on total factor productivity and on the amount
of capital relative to the size of the labour force; the higher is the capital stock relative
to the size of the labour force, the higher will be per capita GDP.
capitallabour ratio (the term we shall use from now on for k/l). This means that
increases in the capitallabour ratio lead to increases in per capita GDP, but this
occurs at a diminishing rate; increasing the capitallabour ratio from $100 of capital
per worker to $110 of capital per worker, for example, leads to a larger increment to
per capita GDP than if capital per worker increased from $1000 to $1010.
Steady State
Economists use a special term for a situation in which per capita output is no longer
growing: the steady state. An economy in the steady state is one where growth in per
capita income has come to a halt; in the SolowSwan model this occurs because
there is no longer growth in the capitallabour ratio. But how could such a situation
come about?
n particular, the idea that the economy has a steady state implies that growth in per
capita income occurs only when the economy has an existing capitallabour ratio
that is below its steady state.