The Solow Model 3 – Taking the Model to Data

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The Solow model is consistent with some aspects of the data on growth but not with other aspects. What do we learn from the consistencies and the inconsistencies?

The Solow model is consistent with some aspects of the data on growth but not with other aspects. What do we learn from the consistencies and the inconsistencies?

Related videos: The Solow Model - (Brief, no math), The Solow Model 1 – Introduction, The Solow Model 2 – Comparative Statics, The Solow Model 4 – Productivity

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I think the Big Push theory is linked to the so-called Poverty-Traps. A poverty-trap in the Solow-Swan model can occur when the production function is somewhat different from the one that we have studied now (the simple k^a). Consider instead a production function that has 3 regions. Region 1, for small levels of k, presents decreasing returns to capital, region 2 (for medium levels of k) presents increasing returns to capital and region 3 (for big levels of k) again decreasing or constant returns. With this production function there can be more than one steady state, in this case, we could have two steady states, one that gets us stuck in region 1 and another somewhere in region 3. If a poor country has this function, the most likely is that they're going to get stuck in the lower steady-state, and the only way that they are going to make it past it is if they receive a massive influx of capital (Big Push) that allows them to escape from this poverty trap. You can find more information in Sala-i-Martin's "Lecture Notes on Economic Growth". http://www.nber.org/papers/w3563.pdf?new_window=1

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The comparison is between two isolated autarkic countries. No free movement of labour between countries.

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The total number of legal immigrants immigrating to the US each year is more than the rest of the world combined.

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Yes, if you are looking to see how much of a difference savings rate could make, then you control for the other factors. What the analysis shows is that the savings rate contribution depends on alpha. We can extract real-world alpha examples and these do not appear to allow sufficient flexibility for savings rates to be the majority contributor to the observed real-world differences in GDP per capita. Hence the assumption (or the model) must be incorrect.

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