The Solow Model

The Solow Model is a workhorse model of economic growth. Many subsequent papers in growth theory and in business cycle theory build on this model. A model of growth helps us to structure our thinking. Why is it, for example, that China is growing faster than the United States despite having much poorer institutions such as the rule of law?  Surprisingly, even a simple version of the Solow model offers some useful predictions and ways to interpret aspects of the the growth data. At MRUniversity this week we have four videos on the Solow model. These videos are a bit more technical than many of our previous videos and we think they will be useful in many other classes such as macroeconomics, especially if you are using a truly excellent textbook. The videos will also be useful for anyone who wants to read more of the literature on growth theory or the empirics of growth (such as can be found, for example, in Barro and Sala-i-Martin’s Economic Growth or David Weil’s textbook Economic Growth). Even if you don’t want to study the theory in more depth, we think these videos will be useful for understanding development and how economists use theory and data to understand the sources of growth (and its absence).

Comments

To get an understanding of growth and other models you can also go to coursera.org and enroll in the Model Thinking class by taught U Mich/Santa Fe Institute's Prof. Page in which you will see several lectures on the Solow model, along with some pretty good dynamic models and demonstrations of it as well using Netlogo . Model Thinking is a great course as well, covering various types of economic and network models that are not typically covered in the stats or economics course you had as an undergrad or grad even a few years ago. The world is not correlation, but more interacting agents in tippy systems. Solow is good, but there is even better, including those that incorporate institutional frameworks in networks.

I really like the Cowen-Tabarrok textbook because it does the Solow Growth model for the introductory macro class. It is accessible and the students seem to like it. The videos should be a nice complement.

Any chance of being historically accurate as in the Swan/Solow model?

second David Beckworth. It is a good text, plus you can easily incorporate financial friction into the Solow model, forcing a wedge between S & I and so reducing gdp. its transparent in a way that the ad/as model isnt

Just out of curiosity, what is the level of mathematical knowledge needed to understand the Solow Growth model?

Very basic algebra and a good imagination.

In Tyler and Alex's textbook you need just to understand the square root function and a bit of graph reading.

"Why is it, for example, that China is growing faster than the United States despite having much poorer institutions such as the rule of law?"

China has a few institutions that are far better. Barriers to entry on new business and business growth (outside of the finance sector) are much, much lower in China than the US.

The solution to the third question of the second video (Cobb-Douglas) does not work (it says neither answer is correct).

Fixed. Thanks.

William Easterly's The Elusive Quest for Growth has a superb introduction to, and critical evaluation of, the Solow model in plain English. I like his pancake analogy for explaining the idea of diminishing returns.

Very good videos.
Always nice to focus on the supply side of things and consider the big picture especially when we are bombarded in the media all the time with short-run AD issues in rich countries.

Was a bit surprised by the country-wise comparison of the per-capita output drivers in the "Productivity" video.
The Human capital per worker seems very high in countries like India and Mexico (over 70% of US human capital per-capita). That's a bit hard to digest especially for India given the much lower literacy and skill levels among Indians.

Shrikanthk, good points. Two comments, first quality of education is not accounted for, which is why some people such as my colleague Garett Jones prefer to use standardized international tests to measure human capital. Second differences in human capital do not track one for one with differences in years of education. An additional year of education, for example, will typically raise wages by say 10% so a country with 5 years of education on average compared to one with four years of education doesn't have 25% more human capital but 10% more.

Great. Thanks!
Also a comparison based on performance in standardized international tests may understate differences in human capital.

For eg : The Indians who do take SAT do very well at it. But they represent a very miniscule section of the population (the English speaking upper middle class). Whereas the average American SAT taker is closer to the "Middle American" in his economic profile.

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