In the steady state of the Solow growth model, the growth rate of income per person is determined solely by the exogenous rate of technological progress.
Many empirical studies have examined to what extent the Solow model can help explain long-run economic growth. The model can explain much of what we see in the data, such as balanced growth and conditional convergence. Recent studies have also found that international variation in standards of living is attributable to a combination of capital accumulation and the efficiency with which capital is used.
In the Solow model with population growth and technological progress, the Golden Rule (consumption-maximizing) steady state is characterized by equality between the net marginal product of capital (MPK – δ) and the steady-state growth rate of total income (n – g). In the Canadian economy, the net marginal product of capital is well in excess of the growth rate, indicating that the Canadian economy has much less capital than it would have in the Golden Rule steady state.
Policymakers in Canada and other countries often claim that their nations should devote a larger percentage of their output to saving and investment. Increased public saving and tax incentives for private saving are two ways to encourage capital accumulation. Policymakers can also promote economic growth by setting up the right legal and financial institutions so that resources are allocated efficiently and by ensuring proper incentives to encourage research and technological progress.
In the early 1970s, the rate of growth of income per person fell substantially in most industrialized countries. The cause of this slowdown is not well understood. In the mid-1990s, the growth rate rebounded, most likely because of advances in information technology.
Modern theories of endogenous growth attempt to explain the rate of technological progress, which the Solow model takes as exogenous. These models try to explain the decisions that determine the creation of knowledge through research and development.