Development Economics

Lecture 12: Neo-Classical Growth Model- Solow

(Part 1)

Prepared by,
Mohammad Saeed Islam
Lecturer
Department of Development Studies
Bangladesh University of Professionals (BUP)
Background
• The Solow neoclassical growth model in particular represented the seminal
contribution to the neoclassical theory of growth and later earned Robert
Solow the Nobel Prize in economics.

• It differed from the Harrod-Domar formulation by adding a second factor,

labor (L), and introducing a third independent variable, technology, to the
growth equation.

• Harrod-Domar model >>> constant returns to scale

• Solow’s neoclassical growth model >>> diminishing returns to labor and

capital separately and constant returns to both factors jointly
Basic Arguments
• In the long run, when an economy reaches its steady state level of output, no
factors other than technology can contribute in growth and growth will occur
only at the rate of technological progress.

• In the way of growth, poor countries grow faster than the richer. As a result
developing countries will catch up the developed countries.

• The Solow neoclassical growth model implies that economies will converge to
the same level of income per worker “conditionally”—that is, other things
equal, particularly savings rates, depreciation, labor force growth, and
productivity.
The Solow Model
• Mathematical Derivation on whiteboard
Policy Decisions
• Catching Up:
• Countries that are catching up have some enormous advantages. To become rich, a poor
country does not have to invent new ideas, technologies, or methods of management. All it
has to do is adopt the ideas already developed in the richer countries. Catching up countries
like China grow primarily through capital accumulation and the adoption of some simple
ideas that massively improve productivity.
• Catching Edge:
• Growth on the cutting edge is primarily about developing new ideas. But developing new
ideas is more difficult than adopting ideas already in existence.