11
The Neoclassical and Endogenous Growth View of Income and Productivity Convergence

In the 1950s, Robert M. Solow developed a model that has come to be a standard instrument in the study of economic growth. In this model, the rate of economic growth depends on the speed with which the input of the factors of production--capital and labour--increases. Ongoing growth may be a result of an increase in input of either or both the factors of production.

In Solow's model, increased saving and capital accumulation leads to a rise in the steady state of production and thereby to only a temporary increase in the rate of growth. Initially, the capital stock per capita rises, and thereby also production per capita. But since capital is assumed to show decreasing returns, the increase in production will decline until the higher saving is matched exactly by the input of capital required to keep the capital stock per capita constant. Production per capita does not increase in the steady state. To the extent that growth occurs, it is determined by technical progress that is not explicable within the framework of the theory.

Let us discuss the dynamics in Solow's model more in depth. We assume that the savings ratio, s, and the rate at which capital depreciates, δ, are constant. In addition, we ignore population growth, which means that the capital intensity, k, is affected only by changes in the capital stock. As a result of a decreasing marginal rate of return on capital, a decrease occurs in the rate at which the capital stock increases. The decreasing rate of growth of the capital stock leads in turn to a proportionally decreasing rate of growth of production per capita. The capital stock does not increase in the steady state, that is, investment, I, is equal to capital depreciation, δK, and capital stock per capita, k*, is constant.

Formally, this can be shown, for instance, by assuming that the

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