Solow Growth Model Meets Data -This is a case study for the Solow growth model w

Question

Solow Growth Model Meets Data -This is a case study for the Solow growth model with population growth and technological progress as seen in class. We will look at how does the Solow growth model perform in predicting the per-capita income growth rate. The simulation results are all provided Here is the U.S. per-capita GDP growth rate from 1950-2005- the same dataset you have in Question 1, which we find that the average growth rate is 2%. U.S. per-capita real GDP growth rate 0.08 0.06 0.04 0.02 0.02 0.04 associates-Paph and Tung of Kenny& Co. -has derived the necessary capital accumulation equation and growth rate equations for you. The production function is given by Y -A¡KÇL!*-notice how the technology parameter, At, is multiplied. The per-capita capital stock is kt Kt/Lt, and the per-capita production function is

Explanation / Answer

c. Yes, the simulated data in the above graph shows that the U.S. has sustained the average of 2 per cent economic growth over long periods of time. The simulated data line has remain close to the level of 2 per cent for the past many years.

d. No, the Solow model cannot explain the fluctuations in the data. The simulated data line is a smooth line while the actual data line shows a lot of fluctuations in the per capita real GDP growth rate. Thus, Solow model can explain the sustained growth rate of 2 per cent but cannot explain fluctuations in the real per capita GDP growth rate.

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