Robert Solow was born of a Judaic household on August 23, 1924 in Brooklyn. Fortunate with the chance to go to public schools, he had a strong academic foundation along with with motive and mentoring he was awarded a scholarship to go to Harvard University in 1940. During his first-year twelvemonth at Harvard he chose sociology and anthropology as his big leagues with a child in simple economic sciences. At the terminal of 1945 Robert Solow decided to function in the US ground forces and subsequently returned to Harvard in 1945. The depression at the clip strongly influenced him to analyze the manner the economic system really worked and after returning from the ground forces he decided to exchange cogwheels and studied economic sciences.
At Harvard he was an helper to Wassily Leontief bring forthing the first set of capital coefficient for the end product and input theoretical account triping his involvement in statistics and chance theoretical accounts which lead him to Columbia University for a concentration in statistics. About the same clip he was besides offered a place to talk economic sciences and statistics at Massachusetts Institute of Technology ( MIT ) which he accepted and overtime his captivation leaned more with macro economic sciences. For 40 old ages Solow worked closely with Paul Samuelson and together they developed legion work together such as: “ Balanced Growth under Constant Returns to Scale ” , ( 1953 ) , “ Theory of Capital ” ( 1956 ) and “ A Complete Capital Model Involving Heterogeneous Capital Goods ” . In 1961, Robert Solow won the John Bates Clark Award which is given to person under 40 old ages who have made a major part to economic idea and cognition. His continued attempts and passion for macro economic sciences resulted to him winning the Nobel Prize in 1987 for his analysis in economic growing.
Over the old ages Solow has continued to be a outstanding figure as an economic expert, his theory is thought wholly over the universe from authorities to his theory thought in schools. The survey of the factors which permit production growing and increased public assistance has been a cardinal characteristic in economic research for many old ages. Robert M. Solow ‘s award recognizes his exceeding parts in this country. This paper will discourse the major parts Robert Solow made to economics in an “ A Contribution to the Theory of Economic Growth “ ( 1956 ) , the influences for his analysis and its relevancy in understanding how the economic system works.
Understanding the Solow growing theory is a challenge due to the figure of theoretical accounts that he incorporates to explicate growing theory. The basic theoretical account focuses on the accretion of capital after which Solow incorporates new factors such as population growing and engineering in order to demo the changed consequence in comparing to the basic theoretical account. To help in development of his Growth Theory, Robert Solow addressed the particulars refering the growing of an beforehand industrial economic system, this was first developed by Nicholas Kaldor. Kaldor has six features for the economic system, four of which Solow focused chiefly to development the Solow theoretical account.
Real end product grows at a changeless rate.
Capital Stock grows at a changeless rate
Real growing and capital stock are likely to be the same
Net income rates show a horizontal tendency with the exclusion of alterations in effectual demand.
The first three features describe when an economic system is in the steady province. To spread out on this definition the steady province as described by Robert Solow is changeless growing and capital stock.
In an article, “ A Contribution to the theory of economic growing ” ( 1956 ) Solow growing theoretical account represented an add-on to the Harod- Domar Model which explained growing forms in footings of nest eggs and capital. The chief distinction between his theoretical account and the Harrod-Domar theoretical account ballad in Solow ‘s premise that rewards could set to maintain labour to the full employed.
The Solow Model is neo-classical and as a consequences focuses chiefly on the supply side. This implies that as long the supply of a good additions so economic growing can be accomplished. In this facet it differs from the Keynesian theoretical accounts which focus on the demand side of the economic system in countries such as: unemployment and rising prices. The supply side In Solow ‘s theoretical account follows the undermentioned premises: One good in production with no alteration in engineering and two factors of production, capital ( K ) and labour ( L ) deducing the undermentioned equation
Y =F ( K, L ) . The demand side for the Solow theoretical account assumes that end product demand is equal to ingestion and hence there is no disposable income in the economic system. Y= C + S
Therefore far the theoretical account describes a dead economic system and Solow introduces dynamic factors in the theoretical account to demo capital accretion which are investing which increases the capital stock and depreciation which decreases capital stock. The salvaging rate in this theoretical account represents the trade-off between ingestion and investing. This means, what is non consumed is saved in the economic system ; this therefore increases capital stock growing or capital accretion in the economic system. In the active economic system in the Solow theoretical account the production alterations and is represented by the equation Y=F ( K, S, a?‚ , k0 ) significance end product is a map of capital, nest eggs, depreciation and capital stock. By using the capital stock additions end product in different periods but at some point the economic system comes to a steady province as described by the Solow Model. The steady province is accomplished when end product and capital are in equilibrium. It besides implies that the economic system will discontinue to turn so there is no alteration in capital at that point. Furthermore an economic system in a positive steady province does non travel from that point hence this can besides be considered as the equilibrium point
The variables listed above can be divided into two variables exogenic which comprises of nest eggs depreciation and capital stock and endogenous which are capital, income and investings. The theoretical account shows that increased nest eggs displacements additions investings which impacts the steady rate doing it to switch besides. This activity illustrates that higher nest eggs in an economic system means that there is higher capital stock therefore taking to higher steady province per worker. Therefore in the economic system one demand to cognize that is the optimal degree of nest eggs is necessary to acquire to maximise steady province which is known was the aureate regulation.
To recap, the steady province can be referred to as long tally equilibrium in the economic system and nest eggs is critical in the theoretical account because it shows that by increasing nest eggs the steady province can switch upward which asserts higher degree of capital stock per worker. The construct of aureate regulation was besides incorporated in the Solow ‘s Growth Theory but prior to that the aureate regulation was a construct by Jon von Neumann and subsequently in the work of Edmund Phelps. In Solow ‘s Growth Theory, he makes the premise that policy shapers will accordingly find a nest eggs rate that will maximise ingestion per worker mentioning to it as the aureate degree of capital accretion.
Robert Solow did non halt here with his theory he went on farther to present population growing in his dynamic theoretical account which besides means that the labour force is turning every bit good. What Solow is exemplifying is the consequence of this exogenic factor on the population. Therefore the capital stock will be divided thinly across the increasing population. Since this addition in population is diminishing the capital stock this indicates there is a negative consequence on income per worker. Solow so adds engineering to the theoretical account, engineering as described by Solow can better efficiency of production and this means that there is an addition in end product finally taking to the sustained growing in the economic system. At this phase in the theoretical account, Solow uses a new production map to depict the economic system Y=F ( K, L, E, a‚¬ ) this means that end product is a map of capital, labour, efficiency and effectual worker for this economic system. Solow goes on to depict what is meant by an efficient worker and this is characterized by cognition, acquaintance and ability. Output can accordingly increase by the efficiency degrees of workers. Efficiency in this theoretical account per effectual worker can travel the steady province equilibrium where capital stock per worker invariable. As a consequence, with technological advancement in this theoretical account the capital stock per worker is turning at the engineering rate even in the steady province due to efficiency in the economic system. We can see that even if capital is non turning in the steady province capital per effectual worker is at the rate of engineering. In add-on, this besides asserts that end product per worker is besides turning at a rate of engineering. Combined, entire end product and capital stock are both turning when the two variables population and engineering are present. The Solow Model therefore shows that technological advancement in the economic system explains sustained economic growing in the context of life criterions per worker.