Activity 2- Measurement of Economic Development and the Solow-Growth Model

1.  What is Solow-growth model? Identify its strengths and weaknesses as a measure of

economic development.

Solow Growth Model is an economic growth model that analyses changes in an economy's
production over time due to changes in population growth, savings rate, and technological
progress rate. One of its strengths is it proposed a theory that determines a country's long-
term income. One weakness is that the Solow model is based on the unrealistic premise
that capital is homogeneous and malleable. Capital goods, on the other hand, are highly
heterogeneous, creating an aggregation problem. As a result, when capital goods are
diverse, it is difficult to achieve a steady growth direction.

2. Choose one (1) measure of Economic Development. Explain concisely how it measures
economic development.

Gross national product (GNP) is a term used to measure the country's economic growth
and wealth. It estimates the total value of all finished goods and services generated through
production owned by a country's citizens in a given period. Personal consumption
expenses, private domestic investment, government spending, net exports, and any income
earned by residents from overseas investments, minus income earned within the domestic
economy by foreign residents, are generally used to measure GNP. Note that it is helpful
but can also be confusing and deceiving if misused.