Solow growth model
Also called: Solow-Swan model, Neoclassical growth model · Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT
Meaning
The Solow growth model (Solow-Swan, 1956) explains growth through capital accumulation with diminishing returns. Output per worker is y = f(k), where k is capital per worker, and each extra unit of k adds less output than the one before. The economy therefore moves towards a steady state where capital per worker stops rising. Two results matter most. A higher saving rate raises the level of income per worker but not the long-run growth rate. Long-run per-capita growth comes only from exogenous technical progress, meaning technology that comes from outside the model.
Example
Suppose India raises its saving rate. In the Solow model, growth speeds up for a while as capital builds up, and income per worker ends at a higher level. Then growth slows again to the rate of technical progress.
Don't confuse with
- Harrod-Domar model: g = s/v, with a fixed incremental capital-output ratio (ICOR, v). Higher saving raises growth directly because the model has no diminishing returns.
- Endogenous growth theory: technology is produced inside the economy through R&D and human capital, so policy can raise long-run growth.
Related concepts
- Steady state
- Capital deepening
- Growth accounting
- Total factor productivity
- Convergence
- Endogenous growth theory