6 Summarizing the implications of the Solow model

6.1 Steady states

By looking at steady states, we can examine why (in the long run) some countries are richer than others (Fact 1), and how that relates to their inputs and productivity (Fact 2) and consumption (Fact 3).

Exercise:. Exercise: Relate the predictions of the Solow model to the first three facts about the data shown in Section 1

6.2 Growth rates

In our stripped-down version of the Solow model, the only reason countries grow is because of “catch up” or transitional growth. Still, we can imagine that if productivity grows every year, countries that are at their ``per worker’’ steady state initially will also be growing over time.

Exercise:. Exercise: Relate the predictions of the Solow model, and the idea of catch up growth, to explain differences in growth rates observed in the data, and the ``convergence’’ of growth rates in rich countries (fact 4 in Section 1 )

You’ll notice that we haven’t really explained fact 5: the fact that rich countries tend to be similiar in some dimensions (geography, culture, and institutions) that the Solow model is silent on. Next, we’ll discuss three theories about ``fundamental’’ reasons that some countries are richer than others.