ABSTRACT
In Chapter 6 we introduced the Solow growth model, which has at its core a constant returns to scale production function. The original purpose of the model was to explain the ‘stylised’ facts of economic growth in developed economies such as the US and Europe. As Solow (1970: 2) noted, ‘There is no doubt that they are stylized, though it is possible to question whether they are facts.’ The key ‘facts’ the model was designed to explain were that real output per person grows at a more or less constant rate over fairly long periods of time, that the capital-labour ratio grows over time and that the capitaloutput ratio has no trend. Solow’s model explains these patterns in the data with a constant return to scale technology and given rates of population growth and technological progress which is labour augmenting. As we noted in Chapter 6, in a steady state, output, capital and labour in efficiency units all grow at the same rate given by the rate of technological progress – which, for the model, is an exogenous parameter
In this chapter we begin with a review of the patterns of long-run growth which entailed fundamental changes to the structure of an economy, and ask in Section 8.3 how the Solow model explains these long-run patterns of growth. In Section 8.4 we introduce two extensions to the Solow model which have been very influential in the empirical analysis of growth, the inclusion of human capital and the dynamic structure of the model. In Section 8.5 we show how exogenous and endogenous models of growth can be compared and how the data can discriminate between them. In Section 8.6 we ask whether, and if so how, the Solow model can explain the patterns of growth we show in Section 3.
