Solow Growth Model
Modern Principles: Macroeconomics
presents a wonderful opportunity to bring
modern growth coverage and theory into the principles class. Because of the inclusion of the Solow
it does present a challenge with that opportunity. We truly believe that Solow is presented in an
appropriate level for principles and the benefits of including it outweigh the challenges.
We realize not all instructors will teach the entire Model as it
is presented. In fact we realize some
instructors will want to minimize the coverage of it entirely while still teaching the wonderful growth
lessons presented in
Modern Principles: Macroeconomics
This document is designed to illustrate the flexibility
of this coverage.
1) Why teach the Solow growth model?
We want students who read the Modern Principles to be able to answer three paradigmatic questions.
Why is South Korea richer than North Korea?
Why is China growing faster than the United States?
t determines the growth rate of the country (or countries) on the cutting edge?
The first question is covered in Chapter 6 and involves incentives and institutions
corruption, the rule of law
, and so forth; in essence
everything the stude
learned about the
invisible hand plus
Answering the first question, however, naturally raises a second question. Why is China growing so
much faster than the United States? After all, on every score China has worse institutions
than the United States. Indeed, if the student is not puzzled by this question he or she may draw
precisely the wrong conclusion
reasoning that if China is growing quickly it must be because i
t has good
his type of error i
s very common. When Germany and Japan were growing more quickly
than the United States
to the German labor system or Japanese "cooperative
capitalism" as the key institutions that the US needed and di
d not have. T
may or not
be growth enhancing but the key point is that one shouldn't compare growth rates without first
correcting for catch
up, the fact that capital in poorer economies tends to be more productive because
capital per worker is low.
ng returns to capital
and its importance in the first section of Chapter 7. Diminishing
takes us quite far in answering the China question. If we add capital depreciation to the
mix we can arrive at a second
conclusion. Capital a
lone cannot explain growth in the long
run. At this stage, we have covered the key elements of the Solow model and we leave it to the
instructor to pursue one of two paths. Finish the Solow model by discussing changes in saving rates and
so forth. An in
structor who follows this path usefully ties growth
the chapters on financial
We have made the material simple enough so that it can be taught to principles
there are diminishing returns in all things
so an instructor ma
y want to allocate more time
to other topics.
Alternatively, an instructor
can follow through on the conclusion that capital alone
cannot explain growth in the long run to ask
explain growth in the long run
es the rate of growth of the cutting edg
The cutting edge countries are the countries that cannot grow much by adding capital (since returns are
low and depreciation of the already existing capital stock is high) and so must grow by
productivity of a given supply of capital.
We cover the economics of ideas
in the second half of Chapter
Together Chapters 6 and 7
give the student a very good grounding in economic growth, both for the
citizen and for the student continuing on in
economics. We think that the importance of economic
growth for human welfare and the value of the unique insights offered by economists
on this topic
than justify the careful attention given to this material in
If I teach the Solow
growth model, do I have to teach it in
No. As is said in the preface:
The second option is to cover only a portion of the Solow model in Chapter 7.
We sometimes do this in our larger classes so this will be a good choice for many.
The chapter h
as been written so the most intuitive and important aspects of the
model are covered in the beginning, more difficult and detailed material in the
middle may be skipped, and then important material on growth and ideas is covered
toward the end of the chapt
er. The material in the middle may be skipped
without loss of continuity. Instructors with smaller and more advanced classes can
easily cover the full chapter. The instructor’s guide written by John Dawson offers
many excellent tips for covering this mater
Specifically, you can
skip pages 124
130, as we sometimes do in our larger classes.
I have to teach the Solow model at all?
No. Again, from our preface:
One important point: it is not at all necessary to teach the Solow model to cover
hapters on business fluctuations. We offer a “Solow growth curve” in these
chapters, but without delving into the details of the Solow model, the curve is readily
explained as a potential growth curve analogous to a potential GDP curve.
Specifically, on p
age 243, we state:
We learned in Chapters 6 and 7 that economic growth depends on increases in
the stocks of labor and capital and on increases in productivity (driven by new
and better ideas and better institutions). Thus, the economy has a potential
th rate given by these fundamental or real factors of production. If markets
are working well and prices are flexible, then an economy will grow at its
potential rate. In other words, when prices are flexible, actual growth will be
equal to potential growt
h. But, we will see later that all prices are not perfectly
flexible; in the short run some prices, especially wages, can be “sticky” and because
of this an economy need not always be growing at its potential.
We call it the Solow growth curve because Rob
ert Solow, one of the giants
of economics, created an important model of an economy’s potential growth
rate. In Chapter 7, we described Solow’s model in more detail, but if you
skipped that section don’t worry; just think of the
Solow growth rate
te of economic growth given flexible prices and the existing real factors of
capital, labor, and ideas.
Thus, you can teach the intuitive growth concepts presented in Modern Principles: Macroeconomics and
introduce the Solow model without actually going i
nto depth as we do in Chapter 7.