Macroeconomics

7-1

The Accumulation of Capital

The Solow growth model is designed to show how growth in the capital stock,

growth in the labor force, and advances in technology interact in an economy as

well as how they affect a nation’s total output of goods and services. We will build

this model in a series of steps. Our first step is to examine how the supply and

demand for goods determine the accumulation of capital. In this first step, we

assume that the labor force and technology are fixed. We then relax these

assumptions by introducing changes in the labor force later in this chapter and

by introducing changes in technology in the next.

The Supply and Demand for Goods

The supply and demand for goods played a central role in our static model of the

closed economy in Chapter 3. The same is true for the Solow model. By con-

sidering the supply and demand for goods, we can see what determines how