AS & A2 Economics Revision Workshops

AS & A2 Economics - Intensive Exam Coaching & Revision Workshops: Book Now!

Stratford | Fulham | Bristol | Birmingham | Gateshead | Leeds | Manchester

Economics Resources Popular resources on the {my channel} blogPopular resources on the {my channel} blog Economics revision quizzes Resource tags for the blog RSS Feed for the blog Twitter feed for this blog Teacher Email Resource Newsletter Category listing for this blog Economics Blog home page Economics Blog Home Page

Tracker Pixel for Entry

Unit 4 Macro: Economic Growth - the Solow Model

Sunday, January 06, 2013
Print Tweet This!Save to Favorites

The economist Robert Solow (pictured) developed the neo-classical theory of economic growth. Solow won the Nobel Prize in Economics in 1987. 

  • Growth comes from adding more capital and labour inputs and also from ideas and new technology.
  • The Solow model believes that a sustained rise in capital investment increases the growth rate only temporarily: because the ratio of capital to labour goes up. 
  • However, the marginal product of additional units of capital may decline (there are diminishing returns) and thus an economy moves back to a long-term growth path, with real GDP growing at the same rate as the growth of the workforce plus a factor to reflect improving productivity.

    “Since 2000, nearly 30 developing countries have grown by 6 percent or more a year. Developing countries are now the engine driving the global economy, accounting for around two-thirds of global growth

    There are many differences across countries but there are some common elements to countries that have grown continuously.  They have stable governments that pursue prudent economic policies, provide essential infrastructure and services, and take a long-term perspective.  They use the opportunities provided by global markets and they have a dynamic and competitive private sector”

    Source: Jim Kim, President of World Bank, July 2012

    Capital investment as a % of GDP

    ‘steady-state growth path’ is reached when output, capital and labour are all growing at the same rate, so output per worker and capital per worker are constant.

  • Neo-classical economists believe that to raise the trend rate of growth requires an increase in the labour supply and also a higher level of productivity of labour and capital.
  • Differences in the rate of technological change between countries are said to explain much of the variation in growth rates that we see.
  • The neo-classical model treats productivity improvements as an ‘exogenous’ variable – they are assumed to be independent of the amount of capital investment.
  • The Solow Model features the idea of catch-up growth when a poorer country is catching up with a richer country – often because a higher marginal rate of return on invested capital in faster-growing countries.
  • The Solow model predicts some convergence of living standards (measured by per capita incomes) but the extent of catch up in living standards is questioned – not least the existence of the middle-income trap when growing economies find it hard to sustain growth and rising per capita incomes beyond a certain level.

  • blog comments powered by Disqus

    AS & A2 Economics Revision Workshops

    AS & A2 Economics - Intensive Exam Coaching & Revision Workshops: Book Now!

    Stratford | Fulham | Bristol | Birmingham | Gateshead | Leeds | Manchester

    Dates and Locations

    AS & A2 Economics - Macroeconomics: National & International Economy (Unit 2),  Global/International Economy (Unit 4)

    • Tuesday 25 March 2014 - London (Stratford City)
    • Wednesday 26 March 2014 - London (Fulham Broadway)
    • Thursday 27 March 2014 - Bristol (Cribbs Causeway)
    • Friday 28 March 2014 - Birmingham (Star City)
    • Tuesday 1 April 2014 - Gateshead (Metro Centre)
    • Wednesday 2 April 2014 - Leeds (The Light)
    • Thursday 3 April 2014 - Manchester (Salford Quays)

    Post-Easter (AS Economics Units 1&2 Combined;  Global/International Economy (Unit 4))

    • Monday 28 April 2014 - London (Stratford City)
    • Tuesday 29 April 2014 - London (Fulham Broadway)
    • Wednesday 30 April 2014 - Bristol (Cribbs Causeway)
    • Thursday 1 May 2014 - Birmingham (Star City)
    • Friday 2 May 2014 - Manchester (Salford Quays)

    tutor2u online store

    PowerPoint Lesson Activities Teacher Conferences & CPD Courses
    Exam Coaching & Revision Workshops Pre-release Case Study Toolkits
    A Level Economics Teaching Support Resources for Business Studies
    Digital Magazines  

    Enter your Email

    AS Economics (Macroeconomics) Revision Guide

    WOW! Economics 2014

    50+ New Teaching & Learning Resources for A Level & IB Economics

    AS, A2 & IB Economics Revision Notes

    Latest resources

    Resource categories Blog RSS feed Blog RSS Feed

    © Copyright Tutor2u Limited 2013 All Rights Reserved