Simple Solow Model

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This Demonstration gives a simple visualization of the Solow growth model. Output, , is a function of capital, ; and is shown in green. A fraction of output is saved and invested so investment is , shown in red. Capital also depreciates at the rate , so depreciation is , shown in blue. If (as shown in light green), then capital accumulates and the economy grows. If (as shown in light red), then capital decumulates and the economy shrinks. If we are at a steady state. The parameter can be thought of as representing technology since an increase in means that more output can be produced from the same amount of capital.

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This Demonstration shows the steady levels of output, , and capital given the parameters. Note that when the savings rate increases, the steady state level of output increases; thus when the savings rate increases, the economy will grow from the old steady state to the new steady state. When the new steady state is reached, however, growth stops. Thus the Solow model indicates that growth must come from a factor that can in principle continue to increase over time, thus the Solow model turns our attention to technology or increases in . See [1] for more discussion.

The parameters have been set to fit well with the discussion of the simple Solow model in [1].

Move the cursor over the functions to see the definitions.

The steady state level of capital, , can be very large for some combinations of parameters, and in this case the plot range can be extended.

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Contributed by: Alex Tabarrok (March 2011)
Based on a program by: Fiona Maclachlan
Open content licensed under CC BY-NC-SA


Snapshots


Details

[1] T. Cowen and A. Tabarrok, Modern Principles: Macroeconomics, New York: Worth Publishers, 2010.



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