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Solow Model of Economic Growth

Info: 3171 words (13 pages) Essay
Published: 11th Oct 2021 in Economics

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Analyse the Solow Model of economic growth and discuss the relationship between population growth rate and long-run standard of living.

In the middle of 80s of XX centuries, the renaissance of interest in the issues of economic growth and the factors determining the course of the growth process happened, especially human capital. Research led to a critical analysis of the achievements to date and initiated work on new growth theories on the basis of which the broadly understood technical progress is interdependent, accumulation of scientific and technical knowledge and human capital is primarily the result of intentional investment decisions of consumers and producers as well as countries that implement a specific long-term economic policy.

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The Solow growth model is also known as the Solow-Swan model. It is a simple macroeconomic exogenous growth model that uses the production function which makes the production volume dependent on the amount of production factors used, such as labour, capital and the state of technology. This model is set within the framework of neoclassical economic school. The Solow model is showing how savings, population growth and technological advances affect the rate of economic growth. According to the assumptions of the Robert Solow and Trevor Swan, the increasing amount of capital that goes to a single employee causes a smaller and smaller increase in the portion of production allocated to him. The function of that model is represented by: y=Af(k)

Where:

y represents production volume per employed employee

A represents constant value which means the increase in labour productivity caused by changes in technology.

k represents Tangible capital per individual employee

Solow in his model extended the Harrod-Domar model by labour as a factor of production. This model is describing mathematically the phenomenon of economic growth. We can define this as increasing form period to period of basic economic quantities such as production, income, consumption and accumulation.

Economic growth occurs when the range of services provided increases and the production of agriculture and industry decreases. Growth is related to the dynamics of each of the components of the economy and even implies the possibility of regression of certain parts of it, then production heading in different directions, having different dynamics, eventually leads to a positive effect of these changes. The concept of economic growth includes, on the one hand, quantitative relationships in the process of increasing effects, inputs and efficiency of the economy, and on the other, the mechanism of economic growth like for example social relationships that keep the entire system in motion. Thus, growth processes consists of the functional structure and the system of social interests as well as the institutional structure of the economy. In analyzes of economic growth, we focus on changes in production over time.

Therefore, it is important to define measures of production growth and the periods for which these measures are calculated. A commonly used measure of economic growth is the production growth rate, also known as the production growth rate. There are four main criteria for classifying economic growth models: Time, Theoretical basis, The number of variables in the model and Principles of model construction.

Time criteria

  • Long-term models - are used to define the path of sustainable growth, therefore they assume that the market provokes forces leading to the use of production capacity. They also serve as a model for the development of the economy and focus mainly on changes in the resources of the labour force, capital and technology. They are showing how model can look like in future and how we can improve our outcome in near future.
  • Short-run models - they relate to Keynesian economics and focus on finding the reasons by which actual production is brought to its potential level. They are perfect to define today’s problem and giving solution to fix possible errors.

Theoretical basics

  • Classic models are characterized by: full use of production capacity, flexible prices and wages, which balances supply and demand, natural unemployment level and balance in the labour market, unnecessary role of the state in adjustment processes, ineffectiveness of fiscal and monetary policy thanks to flexible prices.
  • Keynesian models - in contrast to the classical model, the given lacks price and wage elasticity, therefore the balance in a given case is achieved by means of quantitative adjustments.

Number of variables in the model

  • One-factor models - one factor is tested in them (for example: work or capital), then the other components of economic processes are not important. That model provides information about how one factor is influence model (how important or how insignificant it is) and how we can improve this factor without other factors in count.
  • Two-factor models - include the study of two factors. How combination of those factors could impact our model.
  • Multivariate models - it is possible to study two or more factors. Taking into account more components, it is required to extract more equations.

Principles of model construction

  • Mathematical models - are based on deterministic dependencies and are clearly defined. They are characterized as abstract constructions and not in line with reality. We can’t fully base our decision about next steps based on that model.
  • Econometric models. It is model representative of reality and using that model we can make some decisions.

Over the past 50 years, life expectancy at birth has increased by an average of around 10 years in across the EU, notably through improving socio-economic and environmental conditions, and improving the quality of healthcare and treatment. In today’s world we can observe three main revolutions: economic and technological revolution, socio-democratic revolution and geopolitical revolution.

Those revolutions impact today’s society and influenced our growth in future. Economic and technological revolution through convergence digital, biological and industrial technologies and making digital tools accessible and affordable to the masses of society everywhere fundamentally change the way of virtually based economies and societies. The new "knowledge society" offers great opportunities in terms of productivity and average welfare growth, and empowerment of the individual. However, it can also cause serious disruptions to the social situation: we are already seeing an increase in unemployment in low-maintenance jobs qualifications and consisting in performing repetitive tasks, an increase in inequality within societies, and relative impoverishment middle class in developed countries, including Europe.

In other hand socio-democratic revolution is using better connection of individuals whose position is empowered, for being more creative, more dynamic, less tied to one workplace, but at the same time more demanding and critical. This revolution is allowing a thorough renovation of the social contract and the development of a new form of governance. However, it makes it difficult developing collective agreements and shaping a joint one approaches using traditional political party structures or trade unions. Reluctance towards those in power may deepen with increasing popularity less traditional local initiatives. In any case, the desire to guarantee is getting stronger accountability and transparency at all levels of management.

In opinion of political analysts, a geopolitical revolution will most likely continue high levels of economic growth in Asia, and approx two-hundred-year domination of Europe and the United States of the world is coming to an end. With the advent of new ones the powers of Latin America and possibly the world of Africa will become more multipolar. Globalization will no longer driven and dominated by Western powers in favour of more democracy, more open markets and peaceful international cooperation. This swap paradigm can make key factors such as The United States and China can be more and more focused on confrontation. Post-war cooperation framework as a result of this may be placed under increasing pressure, which will threaten the collective ability to effectively manage ever increasing interdependence. Destructive non-state actors, including those whose activities fuelled by religious extremism, they can increasingly make greater use of existing vulnerabilities in the system. At the same time, the international community is struggling to sustain or rebuild the growing number of the weak and fallen countries.

When considering the topic of population growth, we need to deal with the subject of an aging society. Experts predict that by 2100 the global median age of the population will increase to 42 years, in Europe it is now 43.1. Today, the median in the world is 31 years old, in 1950 it was 24. It is predicted that, starting in 2073, there will be more people 65+ in the world than children under the age of 15. Increased life expectancy and a low birth rate will contribute to the increase in the median age of the population. As a result of the aging of the world population and the associated systematically declining fertility rate, which is expected to drop to 1.9 births per woman in 2100 (compared to 2.5 today), the growth of the world's population will be below 0.1 percent - which is means a slowdown in population growth on a global scale. Then the population is expected to reach 10.9 billion.

By 2100, Africa is the only region in the world where the population will continue to grow significantly and significantly, according to forecasts. According to UN calculations, the population of this continent, from 1.3 billion today, will probably reach the level of 4.3 billion at the end of the century (Europe today - 743 million; in 2100 - 630 million). Projections show that this growth will be driven mainly by the growing population of Sub-Saharan Africa, which could even triple its population by the end of the century. Nigeria is set to surpass the United States in population by 2047. Figures also show that by 2100 half of the babies born in the world will be born in Africa - most in Nigeria.

Source: Eurostat (online data code:demo_pjanind)

The stability of the international situation in the 21st century will depend to a greater extent on how the global population will be distributed and what its structure will be, than on how many people will live in the world. Attention should be paid in to the regions of the world where the population is declining and where it is growing; which societies are aging, where the median age is the lowest, where the fertility rates are positive and highest. A closer look at the global demography - from the distribution of the world's population, through the living conditions of societies and the quality of public services in these countries, to the state of the natural environment and climate change as a consequence of global warming - allows us to predict, among other things, potential migratory flows between regions. Immigration - depending on the activity of governments and the accuracy of adopted policies - can be both a positive response to "disappearing" Western societies and a source of growing social and political problems that will contribute to increasing international tensions. Since many of the consequences of global demographic growth have a transnational dimension, they will also be felt in countries with negative growth. Such countries will in particular suffer from the effects of the deteriorating condition of the natural environment, increasing anthropogenic pressure on natural resources and food demand.

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The opportunities offered by the growth of the world's population include growing global demand, expanding markets and the migration potential, which in the future may be helpful in coping with the consequences of an aging society. The relationship between the climate crisis and the growing population is two-way road for population. On the one hand, the growth of the world's population exerts a very strong pressure on the climate through the increase in greenhouse gas emissions, on the other hand - the ongoing climatic changes make the conditions for life, including human life, less and less favourable. Unless the climate crisis is resolved, it will threaten the lives of millions, and in the long run, billions of people. The consequences of climate change that we can predict and are already taking place include, but are not limited to, extreme weather events, heat waves and massive wildfires, land desertification and species extinctions. Over time, they will make less and less land suitable for living and farming. There may be problems with access to food and drinking water. Rising ocean levels will lead to the flooding of many islands and coastal areas. An indirect, although expected, effect of climate change may be local and international armed conflicts fought over basic resources, such as food and water. In such a situation, killing as many civilians as possible will become not so much their unintended consequence as an end in itself.

Climate change is also one of the important factors leading to the gradual loss of biodiversity. More and more species of plants and animals, including pollinating insects, are becoming extinct and their place is being taken by alien invasive species. Due to the complexity of global ecosystems, the effects of these processes on humans are difficult to predict. Further pressure on agricultural crops can be expected related to the increasing aggressiveness of parasitic species and the decreasing population of pollinators. The prevalence of diseases vectors of mosquitoes, ticks and biting insects is also often mentioned (for example, malaria, Lyme disease, Crimean Congo haemorrhagic fever, Zika, etc.). Due to the decreasing number of natural enemies and the favourable global warming, these arthropods are becoming more and more widespread and dangerous. If climate change is not stopped and reversed within the next half-century, we may pass the point of no return where life on Earth in its present shape becomes impossible. When we think about a rapid demographic growth, it is worth remembering that as long as developing technology does not allow people to be completely independent of the planet's resources, people will continue to be part of nature, subject to its laws. In nature, the sudden and rapid growth of one species usually ends like this: it destroys the resources it needs to live, creating conditions that do not allow it to survive.

Slowing down the trend would be beneficial and desirable in all respects due to the climate and the condition of the natural environment. However, it would mean the need to deal with the problem of an aging society on a global scale. Migration could no longer fill the shortage of jobs in developed countries. If there was a rapid automation of work in the coming decades, the problem would be largely outdated. It should also be noted that limiting the excessive population growth in developing countries may have a beneficial effect on their economy due to increasing the financial capacity of parents in the upbringing and in particular education of their kids. The following precautionary steps are needed to prevent the population from growing too rapidly in Europe and to provide suitable life for big population nowadays.

The European Union needs an economic recovery. The framework agenda takes into account the changed regulatory environment that will favour investment in human capital and encourage innovation in the productive economy. More efficient social safety nets are needed to increase market flexibility and resist deepening inequalities. There is also a clear one the need to strengthen and expand the euro area with while tackling fragmentation and the weakening of the EU-wide internal market. Solve the problem of inequalities as they weaken the cohesion of the European Union and undermine its position economic. An increasing number of citizens are excluded from the economy, and this state of affairs may go worst, because the European Union is inadequately prepared for the upcoming technological revolution. Situation this could highlight the difference between successful and unsuccessful members of society and thus further exacerbate inequalities socio-economic. The focus should be on improvement primary and secondary education, comprehensive, but affordable healthcare, increasing flexibility of the labour markets and the removal of barriers to taking over and hindering competition. The European Union can no longer afford to focus mainly on her internal problems. External challenges violate its boundaries and threatening its cohesion.

Sources

https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Population_structure_and_ageing

https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model

https://corporatefinanceinstitute.com/resources/knowledge/economics/solow-growth-model/

https://www.worldometers.info/world-population/

https://ourworldindata.org/world-population-growth

https://www.paho.org/salud-en-las-americas-2017/?p=1864

https://www.economist.com/special-report/2020/03/26/africas-population-will-double-by-2050?gclid=Cj0KCQjwpdqDBhCSARIsAEUJ0hMJqPMPnaUqudoETvs8f4MRCrN8l5yW5kfwtsD2MiuVegLkyZ8w8gIaAlJXEALw_wcB&gclsrc=aw.ds

 

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