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Solow Model

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monkey
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The notion that nothing in this world will grow continuously without a limit may be always true. This rule applies to economic growth equally well. Keep increasing labour force and capital investment can increase economic growth, however, when the level exceeds that of the steady growth rate it will fall again. Do you think it's justified?

(Fixed typos - softwareNerd)

Edited by softwareNerd
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You must keep in mind what shifts the supply curve to the right. When technology improves, it becomes cheaper to produce an item, resulting in higher outputs at lower prices. When investments result in better productivity, the same thing occurs.

Technological improvement is necessarily limitless, unless you believe in limitations to man's intellect (which you may, but this idea is not supported on this forum), and therefore GDP in terms of yesterday's goods will continually be on the rise.

The key to remember is that a computer that costs $1,000 today would have been worth $5,000 a few years ago. So if we can produce 100 times more $1,000 computers today than we could $5,000 computers then, our real GDP has actually increased by 100 times.

The same thing happens as I invest in my supply line. As my plant improves, the productivity of my employees rise. Even though I still pay them the same, and I may sell my product for less, the real output has clearly risen.

Those are just a couple of reasons that economic growth is as limitless as human achievement.

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Indeed. Do you mean, an increase in goods produced? It is true that there is a strict limit to the physical quantity of goods that exist, however there is no limit to the quantity and quality of ideas, and it is those that determine the worth of the physical goods.

Labor and capital are not the only factors in this equation.

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It is true that there is a strict limit to the physical quantity of goods that exist.

What's the limiting factor? I'd imagine we could produce an infinite amount of computers if we wanted to (even if we ran out of necessary materials on Earth, we could always harness them from other planets at one point).

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What's the limiting factor? I'd imagine we could produce an infinite amount of computers if we wanted to (even if we ran out of necessary materials on Earth, we could always harness them from other planets at one point).

'Infinite', or just very very large? There's probably a limit to the amount of raw material which we could pragmatically access, even given (eg) interplanetary travel, although I assume this limit would be absurdly high.

But in any case, Jennifer's point is correct. There might be a limit to the number of pieces of paper on our planet, but the number of different paintings we could produce is far far greater than this (even though that too is finite). And assuming that a painting is worth more than a blank piece of paper, you have room for economic growth.

Edited by Hal
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The appropriate question is: can human progress, which leads to increasing per capita wealth and happiness, continue indefinitely. The answer is yes it's possible, but certain things can cause a reversal.

The Solow model leaves out essential factors. I've seen it applied as if there was no fundamental difference between Singapore's population and investment inputs and the former Soviet Union's population and investment inputs.

The most significant factors - philosophy, culture, governmental/legal system are nowhere to be found in the Solow model of economic growth.

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The appropriate question is: can human progress, which leads to increasing per capita wealth and happiness, continue indefinitely. The answer is yes it's possible, but certain things can cause a reversal.

The Solow model leaves out essential factors. I've seen it applied as if there was no fundamental difference between Singapore's population and investment inputs and the former Soviet Union's population and investment inputs.

The most significant factors - philosophy, culture, governmental/legal system are nowhere to be found in the Solow model of economic growth.

Thanks for everyone's contribution :D . West, I think you make a very good point that philosophy, culture, legal system and even the style of governmental governance may be significant repressors for GDP growth rate. Solow model ignores those factors may be the fact that Solow planned to set up a basic and simple modeling framework at the very beginning. He first assumed that population growth rate; investment rate (both human and physical investment), depreciation rate, and more importantly technology growth rate are main explanatory variables for economic growth. It's a good exercise to run a simple OLS regression by econometrics software like Gauss and Eviews5.0 to see which factors are more significant. However, if we found that all variables are I(1) and indeed co- integrated we may like to use an VAR Error Correction Model to look deeply on its short run dynamics.

Edited by monkey
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