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Western University
Economics 2152A/B
Jennifer Mori

Chapter 7 pages 219 236The Solow model and Economic Growth Introduction The economic growth model established by Robert Solow is the foundation of growth theory Although there are more modern theories that are in use at the present time Solow is still very useful and in any case it is found throughout the literature on economic growthIn the parlance of growth theory Solow is considered an exogenous growth model because the parameters that determine the long run equilibrium are not endogenously determined within the model Nevertheless Solow does make some useful predications about a condition known as the steady state Consumers and FirmsWe will assume that the number of consumers in our economy is also in the labour force N This number will grow at a constant rate over time n thus the future labour force population will be NN1nN In this version of the Solow model no government is present therefore there is no need of taxes Consumers receive income and can either consume or save itThe equation which describes this isC1sY Notice that consumers save a portion of their income sThis is simply given You can think of s10 or some other value that is a percentage of total income The model does not determine the value of s therefore this parameter is EXOGENOUSThe output of the economy is produced by the production function of the representative firm YzFKNThis production function is assumed to exhibit constant returns to scaleIn the Solow model variables are expressed as per capita values so we will divide the production function by N
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