Introduction to Solow Model

The Solow Model, established by Robert Solow in 1956, is a standard framework for understanding economic growth. It emphasizes capital accumulation, labor growth, and technological progress.

Central to the model is the production function: Y = F(K, L), where Y is output, K is capital, L is labor, and F represents the technology that combines them.

A key implication is the 'steady state', where the economy's capital stock adjusts to a level where new investment equals depreciation, and growth then relies on technology.

Unlike capital and labor, technological improvement is exogenous in the Solow model. It's not explained by the model but assumed to progress at a constant rate.

Critics argue the model's simplicity overlooks factors like human capital, government policies, and varying returns to scale. It assumes a closed economy with no international trade.

The Solow model has been extended by incorporating human capital, environmental factors, and non-constant returns to scale, offering a more comprehensive growth analysis.

Empirical tests have shown mixed results. While useful for long-term predictions, the Solow model often undervalues short-term fluctuations and the role of institutions.