Macroeconomics

8-2

From Growth Theory 

to Growth Empirics

So far in this chapter we have introduced exogenous technological progress into

the Solow model to explain sustained growth in standards of living. Let’s now

discuss what happens when this theory is forced to confront the facts.

Balanced Growth

According to the Solow model, technological progress causes the values of many

variables to rise together in the steady state. This property, called balanced growth,

does a good job of describing the long-run data for the U.S. economy.

Variable

Symbol

Steady-State Growth Rate

Capital per effective worker

k

= K/(E × L)

0

Output per effective worker

y

= Y/(E × L) = f(k)

0

Output per worker

Y/L

= y × E

g

Total output

Y

= y × (E × L)

n

+ g

Steady-State Growth Rates in the Solow Model 

With Technological Progress