7.4 Conclusion

This chapter has started the process of building the Solow growth model. The model as developed so far shows how saving and population growth determine the economy’s steady-state capital stock and its steady-state level of income per person. As we have seen, it sheds light on many features of actual growth experiences—why Germany and Japan grew so rapidly after being devastated by World War II, why countries that save and invest a high fraction of their output have higher material living standards than countries that save and invest a smaller fraction, and why countries with high rates of population growth are poorer than countries with low rates of population growth.

What the model cannot do, however, is explain the persistent growth in living standards we observe in most countries. In the model we have developed so far, output per worker stops growing when the economy reaches its steady state. To explain persistent growth, we need to introduce technological progress into the model. That is our first job in the next chapter.