The Solow Model 3 – Taking the Model to Data
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?
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So the point about increasing savings rate ought to be really powerful - that's linked to the Big Push theory, isn't it?
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
So at 10:15 you assume that there are competitive markets - (in particular competitive Labour Markets) to compare US and Zambia. NOw to have competitive Labour Markets wouldn't you need to have free movement of labour between the two markets? or Does this w = MPL only require localised competitive labour markets?
The US is notoriously strict about labour movement so this seems to be a dubious assumption to make at this stage.
Isn't the flow of capital to poor countries (mining companies in Africa) exactly the type of exploitive development discussed in an earlier lesson on the Spanish 'settlement' of Central and South America?
If I understand the model for individual output correctly reducing n, the number of workers, reduces depreciation and thus output shifts to the right. Does this make sense?
Your conclusion here seems a bit broad given that you were specifically looking into whether savings rate could be responsible for differences in GDP per Capita. You had already assumed that A, n, alpha, delta and n were equal for US and Z. But there was no logical or a priori basis for that general assumption.
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.