Croissance et Emploi

Modèle de Solow
Abdelhak KAMAL

6ème semestre
L3, Sciences Economiques
2023/2024

Slide 1 of 73
The Solow Model and Catch-Up Growth
• Robert Solow – Nobel Prize in Economics
• Total Output, Y, of an economy depends on:
 Physical capital: K
 Human capital: education x Labor = eL
 Ideas: A
• This can be expressed as the following
“production function”:

Y  F(A,K, eL)
12.2
Slide 2 of 73
The Solow Model and Catch-Up Growth
• For now, ignore changes in ideas, education, and
labor so that A, e, and L are constant. The
production function becomes:

Y  F(K )
• MPK: marginal product of capital
 The additional output resulting from using an additional
unit of capital.
 As more capital is accumulated, the MPK gets smaller
and smaller.
• We draw a particular production function in the
next slide where:
Y K
Slide 3 of 73
The Solow Model and Catch-Up Growth
• The “Iron Logic” of Diminishing Returns
Output, Y
Y K
3.2
3
3.2  3.0
MPK   0.2
10  9
1 0
MPK  1
1 0 Conclusion: as more
capital is added,
1 MPK declines.

Capital, K
0 1 2 3 4 5 6 7 8 9 10 11 12
12.4
Slide 4 of 73
The Solow Model and Catch-Up Growth
• Capital Growth Equals Investment Minus
Depreciation
 Capital is output that is saved and
invested.
 Let gbe the fraction of output that is
invested in new capital.
• The next figure shows how output is divided
between consumption and investment when
g= 0.3.

12.5
Slide 5 of 73
The Solow Model and Catch-Up Growth
• Capital Growth Equals Investment Minus Depreciation
Output, Y
20
When K = 100, Output = 10
Y K
15

10

5 Consumption = (1- 0.3) x 10 = 7

Investment = 0.3∙Y
3
2
Investment = (0.3) x 10 = 3
0 Capital, K
0 100 200 300 400
12.6 Slide 6 of 73
The Solow Model and Catch-Up Growth
• Capital Growth Equals Investment Minus
Depreciation (cont.).
 Depreciation: amount of capital that wears out
each period
 Let dbe the fraction of capital that wears out
each period. This is called the depreciation rate
so that:
depreciation
δ
K
 The next diagram shows that the amount of
depreciation depends on the capital stock.

12.7
Slide 7 of 73
The Solow Model and Catch-Up Growth
• Capital Depreciation Depends on the Amount of Capital
Depreciation
8 Depreciation = 0.02∙K

4
42
Slope 
200  100
2

0 Capital, K
0 100 200 300 400
12.8
Slide 8 of 73
The Solow Model and Catch-Up Growth
• Capital Increases or Decreases Until Investment = Depreciation
GDP, Y Depreciation = 0.02∙K
8
At K = 400, Inv. < Dep. → ↓ K
6
Investment = 0.3∙Y
4.5
4 Result:
equilibrium
At K = 100,
3 Inv. > Dep.
at K = 225
→↑K Y = 4.5
2 inv. = dep. =4.5

0 0 100 200 225 300 400 Capital, K

12.9
Slide 9 of 73
The Solow Model and Catch-Up Growth
• Capital Increases or Decreases Until Investment = Depreciation
Check the Math
Check the Math
• At K = 100, Y =√100 = 10
• Depreciation = 0.02x100 = 2 • At K = 225, Y =√225 =15
• Investment = 0.3x10 = 3 • Depreciation = 0.02x225 =
•Investment > Depreciation 4.5
Result: K and Y grow. • Investment = 0.3x15 = 4.5
• Investment = Depreciation
Check the Math Result:
• At K = 400, Y =√400 = 20 1. Investment = Depreciation
• Depreciation = 0.02x400 = 8 2. K and Y are constant.
• Investment = 0.3x20 = 6
•Investment < Depreciation This is a steady state.
Result: K and Y decrease. 12.10
Slide 10 of 73
The Solow Model and Catch-Up Growth

12.11
Slide 11 of 73
The Solow Model and Catch-Up Growth
• Better Ideas Drive Long-Run Economic Growth
(cont.)
 Technological knowledge
• A way of getting more output from the same
input (an increase in productivity).
• We can include technological knowledge in
our model by letting A stand for ideas that
increase productivity. Therefore, let the
production function be:

Y  A K
12.12
Slide 12 of 73
The Solow Model and Catch-Up Growth

12.13
Slide 13 of 73
The Solow Model – Details and Further Lessons
• WhenWhen
K is Kin issteady state
in steady stateequilibrium,
equilibrium, Y
Y is in steady state equilibrium.
is in steady state equilibrium.

Output, Y Depreciation = 0.02∙K

8

6
Investment = 0.3∙Y
4.5
4
The Steady State K is found
3 where investment = Depreciation

Capital, K
0 0 100 200 225 300 400
12.14 Slide 14 of 73
The Solow Model – Details and Further Lessons
• When K is in steady state equilibrium, Y is in steady state equilibrium.

Output, Y
20
Steady state output Y K
15

Depreciation = 0.02∙K
10

Investment  0.3 K
5
Steady state capital stock
Capital, K
0 100 200 225 300 400
12.15 Slide 15 of 73
CHECK YOURSELF
 What happens when the capital
stock is 400?
 What is investment?
 What is depreciation?
 What happens to output?

12.16
Slide 16 of 73
The Solow Model – Details and Further Lessons
• Solow Model and an Increase in the
Investment Rate
 What happens when g , the fraction of output
that is saved and invested increases?
• ↑ g ↑ K ↑ Y
 Conclusion: an increase in the investment rate
increases a country’s steady state level of
GDP.
 We show this result in the next diagram.

12.17
Slide 17 of 73
The Solow Model – Details and Further Lessons
• An Increase in the Investment Rate Increases Steady State Output
Output, Y
20 Y K

15

Depreciation = 0.02∙K
10
Inv.  0.4 K

5 Inv. 0.3 K

Capital, K
0 100 200 225 300 400
Slide 18 of 73
The Solow Model – Details and Further Lessons

Slide 19 of 73
The Solow Model – Details and Further Lessons
• An Increase in the Investment Rate
Increases Steady State Output (cont.)
 An Important Idea
• An increase in the investment rate = ↑ steady
state level of output.
• As the economy moves from the lower to the
higher steady state output = ↑ growth rate of
output
• This higher growth rate is temporary.
 Conclusion: ↑investment rate = ↑ steady state
level of output but not its long-run growth
rate.
 These points are illustrated in following case
study of South Korea. 12.20
Slide 20 of 73
The Solow Model – Details and Further Lessons
• The Case of South Korea
 In 1950, South Korea was poorer than
Nigeria.
 1950s: the investment rate was < 10%.
 1970s: Investment rate more than
doubled.
 1990s: Investment rate increased to over
35%.
 South Korea’s GDP increased rapidly.
 As GDP reached Western levels, the
growth rate has slowed. 12.21
Slide 21 of 73
The Solow Model – Details and Further Lessons
• The Solow Model and Conditional
Convergence
 Conditional Convergence: Among countries
with similar steady state levels of output, poorer
countries grow faster than richer countries.
 The Solow model predicts that a country will
grow faster the farther its capital stock is below
its steady state value.
• Conclusion: Conditional convergence is a
prediction of the Solow model.
 The next figure presents evidence of
convergence.
Slide 22 of 73
The Solow Model – Details and Further Lessons

12.23
Slide 23 of 73
The Solow Model – Details and Further Lessons
• Solow and the Economics of Ideas in
One diagram
 Generation of ideas results in long-run economic
growth.
 Let’s see how this works:
• We begin at steady state equilibrium.
• New ideas → ↑A → ↑Output at every level of K
• ↑ Output → ↑Investment → Investment >
Depreciation →↑ K→ ↑ Output (movement
along new production function).
• As ideas continue to grow, output continues to
grow.
12.24
Slide 24 of 73
The Solow Model – Details and Further Lessons
• Solow and the Economics of Ideas in One diagram
(cont.)
Effect of ↑A from 1 to 1.5
Output, Y Y  (1.5) K
c
33.7

Output ↑ b

Better
Ideas
Y  (1) K

15
a
Depreciation = 0.02∙K
Investment  0.3(1.5) K
Investment  0.3(1) K

225 506 Capital, K

Slide 25 of 73
Appendix
• Excellent Growth (cont.)

Second, calculate output,

Y, using the formula:

Y  K

12.26
Slide 26 of 73
Appendix
• Excellent Growth (cont.)

Third, graphs can be created using the data generated

In the steps one through three. 12.27
Slide 27 of 73
Appendix
• Excellent Growth (cont.)

Lastly, you can experiment with different investment

shares in E2 or the depreciation rates in F2.
12.28
Slide 28 of 73
Appendix
• The Mathematics By plotting these two
Recall
1
expressions
Investment  Y  γ K  γK (e.g., 0.3  K )
2
separately on a graph,
Depreciation  K (e.g., 0.02  K ) we can see how the
thus steady state changes
1
ΔK  Investment - Depreciation  K  K
2 with the values of the
The growth rate of the capital stock is given by investment rate and
1 depreciation rate.
ΔK K 2
K 
 Growth rate of K    1 
K K K
K2
Implication :

If 1
   Growth rate of K is positive
K2

1
   Growth rate of K is negative
K2
12.29
Slide 29 of 73
Appendix
• The Spreadsheet

Plotting Y against time shows the transition to steady

state 12.30
Slide 30 of 73
Appendix
• The Spreadsheet
Output, Y

16.00
14.00
12.00
10.00
8.00 Output, Y
6.00
4.00
2.00
0.00
0 100 200 300 400 500 600
Time

Result: The transition to steady state proceeds at a

decreasing rate. As K approaches 400 growth slows down.

Slide 31 of 73