The Neoclassical Growth Model Under a Constant Savings Rate

Abstract

We present in this chapter the first growth model, introduced almost simultaneously by R. Solow and S. Swan in two different papers published in 1956. In fact, as we will see, the assumptions embedded in this model imply that, in the long run, and in the absence of technological growth, economies do not grow in per-capita terms. The possibility of aggregate growth arises only from either population growth or growth in factor productivity. Since neither factor is supposed to depend on the decisions of economic agents, this is known as an exogenous growth model. There are model economies for which there are steady-states with constant, non-zero growth rates determined by some decisions made by economic agents, like the level of education, or by some policy choices, like a given tax rate. These are known as endogenous growth models and will be studied in later chapters.