Long-Run Growth: Solow-Swan Model
Motivation, Theory, and Simulations of Robert Solow’s 1956 Growth Model, a fundamental model of long-run economic growth analysis.
Macroeconomics is the study of aggregates, phenomena observed to emerge from collective actions of firms or households in an economy. The aggregates include national output, employment, the overall price level and the balance of payments. For example, Gross Domestic Product (GDP) is a measure designed to capture the total output of an economy; a system that involves households providing labor for wages, firms supplying goods or services for profit, and governments implementing policies for stabilizing demand and supply.
Macroeconomists, thus, care a lot about quantifying macroeconomic performance. This is currently assessed by inspecting four key indicators: Employment, Price level stability, Economic growth, and Balance of payments.
We care about these because we believe they are primary determinants of living standards. In other words, as economists we care about improving people’s living standards and wellbeing as measured by these four indicators because we are concerned that the costs associated with declines in each of these outweigh potential benefits.
This post focuses on a fundamental theory of growth proposed independently by Robert Solow and Trevor Swan in 1956.
