Economic Growth Models - Essay Example

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Economic Growth Models

Assuming that all regions possess similar technology and similar preferences, and that there are no institutional barriers to the flow of both capital and labor across state borders, the Solow-Swan neoclassical growth model predicts that states would have similar levels of real per capita income in the long run (convergence). Across regions of a given country that share such a common long-run level of real per capita income, convergence of per capita incomes is driven by diminishing returns to capital. That is, each addition to the capital stock generates large increases in output when the regional stock of capital is small. If the only difference between regional economies lies in the level of their initial stock of capital, the neoclassical growth model predicts that poor regions will grow faster than rich ones—regions with lower starting values of the capital-labor ratio will have higher per capita income growth rates. Other channels through which convergence can occur are interregional capital mobility; the diffusion of technology from leader to follower economies; the redistribution of incomes from relatively rich regions to relatively poor regions of a federal country by its central government; and flows of labor from poor to rich regions (Cashin and Sahay 1996, p.49).Agénor and Montiel (1999, p.677) note that the neoclassical growth model only predicts “conditional” convergence, that is a tendency for per capita income to converge across countries only after controlling. ...Show more

Summary

In the paper “Economic Growth Models” the author analyzes the neoclassical growth model was developed by Solow (1956) and Swan (1956). It is built upon aggregate, constant returns to scale production function that combines labor and capital in the production of a composite good.

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