The Solow Growth Model is a standard neoclassical model of economic growth. Developed by Robert Solow, it has three basic sources for GDP: labor (L), capital (K) and knowledge (A). "Knowledge" is a sort of catch-all category used to augment labor (AL), called "effective labor".
The model has the following assumptions:
- As note
- Finally, we assume the growth rates of knowledge and labor are constant. The portion of production saved for investment, s, is also assumed to be constant (and exogenous), as well as the rate of depreciation.
- It should be noted that s and Y (output) directly effect the growth of k in the economy.
The Solow model is so straightforward, it's worth pointing out what it does not include. Government, multiple goods, changes in employment, natural resources, geography and social institutions are main features the model ignores. It is, however, this simplification that allows us to better understand the role of capital, labor and knowledge in our study of economic growth.
The Solow model predicts conditional conversion. This means that countries with similar characteristics converge to the same steady state (situation in which k stays the same). Similar characteristics means in this model that the savings rate of both countries is equal.
- Romer, David. Advanced Macroeconomics. p9-17