In Macroeconomics one topic question driving the analysis of the economic system is about explaining the differences, inequalities and sperequation between poor and rich countries, and eventually how to overcome it on a technical basis. Or in other words, which forces drive the economic growth. This investigation has become even more actual nowadays in the light of globalization and inter-correlation among different counties' economy.
The Solow growth model tries to explain these dynamics by analysing the growth path and proving its findings through a mathematical-economic demonstration. It is a simplified model, in that it takes many assumptions, nonetheless providing a basic explanatory approach to identify the driving forces influencing and affecting economic performance.
The basic approach summarises the fundamental economic concepts about production function of a country as the mix of labour and capital employed. Differently from endogenous model, this one introduces some exogenous variables as technology, growth rate and savings. Introducing exogenous variables means that the model itself will not explain their behaviour, as they are given. In this view the model tries to define the relationship among variables stating three main predictions: savings affect investment and thus capital accumulation which ultimately results in greater production or GDP per worker, cross country convergence to a steady state growth path on the long run. Nonetheless the model fails to depict reality in a consistent manner when tested and confronted with reality: the physical capital accumulation alone does not fully explain increase in production and productivity. From this assessment originates the Mankiw, Romer, and Weil (MRW) intuition to augment the original Solow model with the human capital specification. With this correction the model’simulation becomes more consistent, and redefine the relation between capital and production.
Their findings are...