Output and Capital Grow with Population Essay

Output and Capital Grow with Population Essay

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It assumes that labor force, capital and output grow at constant rates. As the population grows more needs to be invested to keep ‘capital-per-worker’ constant. This is what makes up the investment line (NK). Curve Y shows the output per person and curve Sy shows savings/investment per person. The model shows a ‘steady-state’ (E), where savings per worker (Sy) crosses the investment line (NK). This point shows that investment is enough to keep capital per worker constant (K*), which gives output per worker (Y*). Therefore output and capital grow with population.

Solow and Swan conclude that to grow beyond the steady-state something must increase outside the model: labor-augmenting technical progress (A), which determines long run growth. They also say that different savings and population growth rates affect different countries steady state levels. Countries with higher savings rate will tend to have a higher per capita income and the output per worker increases until a new equilibrium is reached, and then all variables grow at same rates as before. Solow-Swan report that increases in capital does not always correlate to productivity as capital depreciates and is subject to diminishing marginal returns. The model predicts convergence in growth rates on the basis that poor countries will grow faster than rich countries (Begg and Fischer et al. 2003).

2.2 Endogenous model
Romer (1986) and Lucas (1988) proved the Solow-Swan model needed extending by noting that endogenous factors are positively related with long-run growth. The Solow-Swan model assumes economic growth depends technical progress, however technology progress may be as a result of economic and political factors. Romer and Lucas proved that investing in resear...

... middle of paper ...

...al (proxied by 1960 school-enrollment rates). He also predicts that poor countries catch-up with the rich countries growth rate, but only if the poor countries have high human capital per person. He notes in his former model (Barro, 1990) that investment in education increases per capita growth, which further increases investment through knock-on effects. Since efficient human capital will lead to an increase in productivity, investment and growth.
Recently Cutler et al. (2005) also finds the positive relation between education and economic growth. They argued better education had induced improvements in technology that contributed to decreases in mortality and increases in life expectancy. The improvements in technology came from better incomes, induced by better education. Their results also found that countries with better education tend to have higher income.

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