ABSTRACT
The most influential neoclassical growth model was developed in the 1950s by Robert M. Solow and T. W. Swan and is known as the Solow-Swan growth model. Like the Classical model with exogenous labor supply, this model takes the growth of the labor supply to be the main constraint on capital accumulation. But unlike the Classical model, the Solow-Swan model assumes that the saving rates out of wages and profits are equal. In order to ensure that the Solow-Swan model achieves a stable equilibrium, it is necessary to assume the existence of a neoclassical aggregate production function. The Solow-Swan model achieves its steady state equilibrium when the capital-labor ratio remains constant over time. One of the most important applications of the Solow-Swan model is to the issue of how an increase in the national saving rate affects the long-run equilibrium of the economy.
