Economic growth and economic development 51
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CHAPTER 2
The Solow Growth Model
The previous chapter introduced a number of basic facts and posed the main
questions concerning the sources of economic growth over time and the causes of
differences in economic performance across countries. These questions are central
not only for growth theory but also for macroeconomics and social sciences more
generally. Our next task is to develop a simple framework that can help us think
about the proximate causes and the mechanics of the process of economic growth
and cross-country income differences. We will use this framework both to study
potential sources of economic growth and also to perform simple comparative statics
to gain an understanding of what features of societies are conducive to higher levels
of income per capita and more rapid economic growth.
Our starting point will be the so-called Solow-Swan model named after Robert
(Bob) Solow and Trevor Swan, or simply the Solow model for the more famous of
the two economists. These two economists published two pathbreaking articles in
the same year, 1956 (Solow, 1956, and Swan, 1956) introducing the Solow model.
Bob Solow later developed many implications and applications of this model and
was awarded the Nobel prize in economics for these contributions. This model
has shaped the way we approach not only economic growth but the entire field of
macroeconomics. Consequently, a byproduct of our analysis of this chapter will be
a detailed exposition of the workhorse model of much of macroeconomics.
The Solow model is remarkable in its simplicity. Looking at it today, one may fail
to appreciate how much of an intellectual breakthrough it was relative to what came
before. Before the advent of the Solow growth model, the most common approach
to economic growth built on the model developed by Roy Harrod and Evsey Domar (Harrod, 1939, Domar, 1946). The Harrod-Domar model emphasized potential
dysfunctional aspects of economic growth, for example, how economic growth could
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