Class Notes (836,518)
Canada (509,851)
Economics (472)
ECON 255 (24)

W2 Notes on Solow.docx

3 Pages
Unlock Document

ECON 255
Ashok Kotwal

Notes on Solow’s Surprise: Investment Is Not the Key to Growth - Solow’s Theory: Investment in machinery cannot be a source of growth in the long run but technological advancement can  y = A ∙ f(k) - Views are shifting from Harrod-Domar conclusion that growth was proportional to investment in the short run but most economists still maintain that investment was the dominant determinant of growth in the long run - Capital fundamentalism: the belief that increasing buildings and machinery is the fundamental determinant of growth of capital fundamentalism  this is what the majority believes as the recipe of economic success [Solow’s Shocker] - Growth: refers to an increase in an individual’s standard of living - Labor productivity: average number of goods produced on average  Labor productivity can be increased by increasing machinery and labors BUT - This leads to Diminishing Returns: basically occurs when 1 factor of production is increased indefinitely relatively to another factor of production.  when the rate # of machinery is added faster than the # of labor, the productivity of a worker will decrease [The Flour Next Time]: just an analogy - The importance of knowing the most significant variables that can influence GDP - Capital Income: all the incomes accrued from direct or indirect owners of the buildings and machines  Example: corporate profits, stock dividends and interest income on loans [Not the Way to Grow] - Buying more machinery until K > L is not the solution for economic growth. By doing so, the growth at the beginning will be extremely high but in the long run, it will reach its steady state  diminishing returns to increasing machines appear - As for high-saving economies, its economy will be higher than the low-saving economies but in the long run, both economies won’t be able to sustain economic growth [It’s Technology, Stupid] - More efficient technology allows more efficient machinery. Solow said that: in the long run, the growth of production per worker has to be labor-saving technical change  Let’s assume that if all the available market is totally concentrated because of the high population, then what’s going to happen?  people migrating to another country? Developing more technology (role of education is important)s is it? Comment: Solow’s surprise works on the assumption that one factor of production is held fixed. What if the # of labor increases too? Or is it trying to point that, in the long run, when resources are becoming scarce/fixed and # of machines keep on increasing, there will
More Less

Related notes for ECON 255

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.