Economic Growth Models Essay Example | Topics and Well Written Essays - 2500 words

Economic Growth Models - Essay Example Y = AKL1-, 0where A measures the level of technology. Output per worker, y = Y/L, is thus given by y = Ak where k denotes the capital-labor ratio. Capital accumulation is given by k = sy - (n + )k, 0 where s denotes the propensity to save, n > 0 the exogenous rate of population growth, and the rate of depreciation of physical capital(Agnor and Montiel 1999, p.671). The Solow-Swan growth model predicts that growth should be uncorrelated with the ratio of national investment to total output (gross domestic product or GDP). If capital markets are open, the model predicts instantaneous convergence of output per capita across countries. Convergence is achieved by capital flows from rich to poor countries and a consequence of these flows is that the ratio of national savings to GDP in each country should differ substantially from the ratio of investment to GDP since there is no reason to expect that countries with high savings rates should be those with large investment opportunities. In the presence of capital market imperfections, such as the inability to borrow to finance human capital accumulation, convergence is predicted to occur more slowly (Farmer and Lahiri, 2003). Figure 1. Equilibrium in the Solow-Swan Model Source: Kalyvitis (n.d., p.6) Assuming that all regions possess similar technology and similar preferences, and that there are no institutional barriers to the flow of both capital and labor across state borders, the Solow-Swan neoclassical growth model predicts that states would have similar levels of real per capita income in the long run (convergence). Across regions of a given... Assuming that all regions possess similar technology and similar preferences, and that there are no institutional barriers to the flow of both capital and labor across state borders, the Solow-Swan neoclassical growth model predicts that states would have similar levels of real per capita income in the long run (convergence). Across regions of a given country that share such a common long-run level of real per capita income, convergence of per capita incomes is driven by diminishing returns to capital. That is, each addition to the capital stock generates large increases in output when the regional stock of capital is small. If the only difference between regional economies lies in the level of their initial stock of capital, the neoclassical growth model predicts that poor regions will grow faster than rich ones—regions with lower starting values of the capital-labor ratio will have higher per capita income growth rates. Other channels through which convergence can occur are interregional capital mobility; the diffusion of technology from leader to follower economies; the redistribution of incomes from relatively rich regions to relatively poor regions of a federal country by its central government; and flows of labor from poor to rich regions (Cashin and Sahay 1996, p.49).Agà ©nor and Montiel (1999, p.677) note that the neoclassical growth model only predicts â€Å"conditional† convergence, that is a tendency for per capita income to converge across countries only after controlling.