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3.1 - Introduction

from 3 - The Solow Model

Published online by Cambridge University Press:  05 May 2016

Humberto Barreto
Affiliation:
DePauw University, Indiana
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Summary

Before presenting the Solow model, it is worth stepping back to consider exactly what a model is and what it is for. In modern economics, a model is a mathematical representation of some aspect of the economy. It is easiest to think of models as toy economies populated by robots.…The best models are often very simple but convey enormous insight into how the world works.

– Charles Jones

Consider this discussion, versions of which have been played out countless times in faculty offices around the world:

Professor: Welcome. How can I help you?

Student: I am having trouble with the Solow Model. It is confusing.

Professor: Yes, this is a difficult model. What exactly is the problem?

Student: I can see how increasing the rate of population growth (n) or the depreciation rate (δ) will hurt the economy –

Professor: The nifty canonical graph, also known as the Solow diagram [which the professor quickly sketches as in Figure 3.1.1], makes that obvious, don't you think? The line rotates up and steady-state capital per worker in efficiency units falls, so steady-state output and consumption per worker in efficiency units will also fall. Ta-da!

Student: I see that for n and δ, but g is where I get really baffled. Why would technological progress hurt the economy? Shouldn't an increase in g help, with more consumption as we produce more output with the same resources?

Professor: You are forgetting that the x axis on the canonical graph is capital per worker in efficiency units. That's not the actual economy –

Student: I know that. You emphasized this point a lot in class. But here's my question then: Where is the actual economy? How can I see what is happening there? Does the canonical graph have some secret trap door that reveals the impact of g on the economy itself, not in efficiency units but in actual output per worker?

Professor: Um, no, there are no secret trap doors. The canonical graph just provides an ingenious way to find the steady-state in a model with constant technological progress. That is all it does.

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Publisher: Cambridge University Press
Print publication year: 2016

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References

The epigraph is from Jones, C., Introduction to Economic Growth, 2nd ed. (W. W. Norton, 2001), 21. Jones's presentation of the Solow Model is clear and accessible to undergraduate students, which is also true of Mankiw and Weil:
Mankiw, N. 2013. Macroeconomics. 9th ed. Worth. The parameter values for the initial problem in the workbooks (always available by clicking the button) are from Mankiw.
Weil, D. 2013. Economic Growth. 3rd ed. Prentice Hall.
Acemoglu, D. 2008. Introduction to Economic Growth. Princeton University Press.
Romer, D. 2012. Advanced Macroeconomics. 4th ed. McGraw-Hill.
Novales, A., Fernández, E., and Ruíz, J.. 2009. Economic Growth: Theory and Numerical Solution Methods. Springer.

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  • Introduction
  • Humberto Barreto, DePauw University, Indiana
  • Book: Teaching Macroeconomics with Microsoft Excel®
  • Online publication: 05 May 2016
  • Chapter DOI: https://doi.org/10.1017/CBO9781316451014.012
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  • Introduction
  • Humberto Barreto, DePauw University, Indiana
  • Book: Teaching Macroeconomics with Microsoft Excel®
  • Online publication: 05 May 2016
  • Chapter DOI: https://doi.org/10.1017/CBO9781316451014.012
Available formats
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  • Introduction
  • Humberto Barreto, DePauw University, Indiana
  • Book: Teaching Macroeconomics with Microsoft Excel®
  • Online publication: 05 May 2016
  • Chapter DOI: https://doi.org/10.1017/CBO9781316451014.012
Available formats
×