Macroeconomics

7-4

Conclusion

This chapter has started the process of building the Solow growth model. The

model as developed so far shows how saving and population growth determine

the economy’s steady-state capital stock and its steady-state level of income per

person. As we have seen, it sheds light on many features of actual growth expe-

riences—why Germany and Japan grew so rapidly after being devastated by

World War II, why countries that save and invest a high fraction of their output

are richer than countries that save and invest a smaller fraction, and why coun-

tries with high rates of population growth are poorer than countries with low

rates of population growth.

What the model cannot do, however, is explain the persistent growth in liv-

ing standards we observe in most countries. In the model we have developed so

far, output per worker stops growing when the economy reaches its steady state.

To explain persistent growth, we need to introduce technological progress into

the model. That is our first job in the next chapter.