What are the Main Limitations of the Solow Model

What are the Main Limitations of the Solow Model Introduction – Explanation of Solow model Solow model is one of the unique theories that explain the long-term national economic growth. In spite of its uniqueness, it has some significant limitations. This paper discusses the meaning and major limitations of Solow model with respect to the available theories and economic references.Advertising We will write a custom essay sample on What are the Main Limitations of the Solow Model? specifically for you for only $16.05 $11/page Learn More The model is based on three major assumptions. First, the two factors of production (capital and efficient labor) possess perpetual returns to scale. Labor as well as knowledge develops exogenously at considerable rates. This means that the number of effectual labor units will grow at a rate given by the sum of population growth (n) and (Output per worker (g). Secondly; it assumes that other inputs apart from capital, labor and knowledge are not significant. And final ly, the portion of the production invested or saved is constant and equivalent to savings in a closed economy (Todaro Smith 2011, p. 82). The fundamental explanation of the Solow model is that simply the promptness of the technical growth is lasting for significant durable economic advancement. Thus, political advancement can only be fruitful in the long run so long as it favors the technical advancement. This model was established by Robert Merton Solow and Trevor Swan in 1956. The Solow model enlightens long-term economic growth based on technological advancement, work, and majors on the national economy. The fundamental support is that economic progression converges on a lasting foundation against equilibrium, where the investments into the capital stock become equivalent to the writings-off from the capital stock. This support is reasonable, because in this equilibrium the discarded machines are instantaneously exchanged with new ones. This implies that, the national economy wi ll develop provided that the investments are greater than the writings-off and the reverse will also be true. In addition, approval is attained to the degree that the pro head capital stock descends with increasing population growth, because the available revenue has to be distributed on more people.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Furthermore, the rate of the technical development is shown in the domestic economy. This lets the available capital stock to come to be obsolete (Krugman 1994, p. 73). This model is also known as neoclassical growth model. It is varies from other economic development models since it comprises of several equations to illustrate how production, capital goods, working time, as well as investments influence each other. It is based on the fact that different nations use their resources effectively, and with increase in labor, there is a decl ine in returns. In addition, Solow model indicates that technology is a very significant factor for economic growth, and capital grows with improvement in technology. As a result the investments of a country increase and then it realizes an overall economic development. Also, it determines that the advancement on each and every national economy meets against a point provided on a long-lasting basis by the investments put into the national economy. The continuous writing-off rate is dependent on population increase as well as the rate of technological advancement. Therefore, for long-term development in the national economy, there have to be technological advancement (Ray 1998, p.100). Main limitations of Solow model There have been numerous denunciations of Solow model, most of them associated with its combined and wholly supply-side nature. It is not practical to explain all economic production in just a single production function (Solow 1994, p.23). Besides, aggregate capital stoc k can never be symbolized by one function as in the Solow model (Solow 1957, p. 315). There are several various kinds of output, most of which are never included in the typical GDP accounts, and investments assume several different forms.Advertising We will write a custom essay sample on What are the Main Limitations of the Solow Model? specifically for you for only $16.05 $11/page Learn More Positively, there is no one decrease function, considering the fact that there are several diverse forms of capital. Furthermore, there is no distinct saving function that can be associated with the entire production function since national economy involves numerous different kinds of people, whose combined savings is based on the distribution of revenue and several other factors that diverge liable to the kinds of production outcome. For instance, there is dissimilarity between human and physical capital. Physical capital comprises of tools, machineries, structures, t ransportations, and power plants, among others, that are employed by human beings in production. In contrary, human capital includes skills acquired through schooling, training, practice, and socialization (Ellman 1989, p. 64). The word Human capital is used by economists since, like all capital, it is an expensive resource made in the economy through the process of investments. For instance, in most cases, Economists model training as an investment is a prolific resource. Again, just like physical capital, human capital is dependent upon decline and undesirability. Proponents of the Solow model overlook the awareness and human technologies that have been internalized, and, as technological transformation takes place, some accrued knowledge and experience could become obsolete. Eventually, old people pass away and the younger generation who substitute them must be provided with knowledge from the civilization’s store of knowledge. Just like physical capital, growth in per cap ita human capital necessitates investments that surpass the declining stock of the per capita human capital.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More The neoclassical Solow model fails to differentiate between the different kinds of capital and, thus it can never be used to assess the dissemination of returns from investment in physical of human capital. Remarkably, there is an indication that human capital is particularly significant for growing knowledge and technology, a factor the Solow model considers as exogenous. Most of the critics of the Solow model are strong supporters of endogenous growth. One of the major limitations of this theory lies in convergence of the progress of a national economy as advocated in the Solow model. This implies that inferior national economies unlock on a lasting basis to the wealthier nations, because they are able to develop at much faster rate without much difficulties (Bosworth Collins 2008, p. 53). However, this convergence could not be established in every national economy. Some of the nations that experienced converging growth include Europe and North America. Besides, Southeast Asia al so realized converging economic growth up to the financial crisis, which was experienced in the 90’s. Moreover, the calculated convergence speeds are extremely high and the Solow model indicates only significant results for the 20th Century. Solow model is also established on the theory of a closed economy. This means that, convergence theory assumes that a group of nations does not have any kind of relationship. Nevertheless, this problem can be avoided, according to Solow, that each and every model has certain imaginary assumptions but could flourish if the final consequences are not subtle to the generalizations used. Besides the model recommended by Solow, there have been several efforts at building a growth model for an open economy, for instance those developed by Birro, Mankiw and Sala-l-Martin in 1995 (Nelson Pack 1999, p. 418). The major reason why there is a global economic crisis is that people have failed to recognize that they form part of the environment, and i t is their obligation to protect it. Additionally, they have failed to acknowledge that they are responsible for controlling the available natural resources for successful economic advancements (Hunter James 20). Currently, there is a heated debate concerning the viability of the business world. The debate is whether the achievements of a business organization should be determined by the quantity of shares and profits realized or whether some other factors should also be taken into consideration. When evaluating the ability of a business organization to maintain its operation, and the challenges it faces, investors will majorly consider the effects of the business on the local people. Besides, they will consider how the operation will affect the natural resources being used. Precisely, it is notable that Solow model was developed to explain long-term national economic growth in a more precise manner. It is a unique theory and it varies from other economic development models since i t comprises of several equations to illustrate how production, capital goods, working time, as well as investments influence each other as indicated before. Another limitation of Solow model is that technological advancement is the only factor considered for long-term national economic growth but at diverse levels of revenue based upon investments and population growth. However, technological development is considered as exogenous since it not explained as it is by this model. The equilibrium growth rates of the pertinent variables is determined by the rate of technological advancement, which is an exogenous factor, the persons in the Solow model as well as theories developed from it does not have the incentive to create new goods. In this essence, Solow model does not integrate human capital, which not only common sense but also new growth theory, would consider very significant for national economic growth. According to capital acquired from the assessments of the model, inherent share of revenue does not relate closely with national accounting information. Nations that that grow rapidly, especially picking up after a crisis, are likely to have a swift turn-over in technologies since they accumulate more capital. However, most critics put forward that this will make it more challenging to gain sufficient experience with the existing technologies. Moreover, in these instances, zero Solow residual points out to increasing labor productivity. In the Solow model theory, if labor productivity as a factor of production is not declining as new areas of expertise become necessary then it implies that the work force is proficient of adapting. This is likely to have the growth of output undervalued by the residual. In other contexts, organizational turnover is associated with the way businesses change and develop specifically. According to the Solow model, this increases or decreases the number of employees that decide to leave a business. There are problems with the development within a business and lapses in the production that occurs (Mankiw, 2004). More important, there are difficulties with the communication and development within a specific organization. Employee development, commitment, and intention are the three top factors of turnover rates as well as the empowerment that is associated with those who are within an organization. If these do not factor in the correct way, then it leads to difficulties within the workspace, specifically because there are problems with growth and development with individuals and the association, which they carry with career skills. The other employees as well as the organizational environment suffer from the impact because of the human assets which each employee carries in his or her endeavors. In 1998, Lucas tried to solve this complication by enlarging the conception of capital to take account of physical and human factors. Human factors comprise of education, and every so often health. In addition, savi ngs or investments that are the vital variable enlightening what extent of steady state revenue various nations attain, is also exogenous (Solow, 1956). The disapproval to exogenous technological growth assumes the endogenous growth theory. As well, this model does not provide answers to the how and why questions related to the occurrence technological progress. As a consequence of these failures, endogenous growth theory was developed. This explains technological development as well as accumulation of knowledge. Closely related to these critics of the Solow model, in 1992, Mankiw and Romer published a reviewed description of the model, which comprised of the human capital factor and education into the calculation of growth. The challenges of the misplaced convergence and overrated convergence speeds are clarified accurately in this manner (Romer 1993, p. 552). From the understanding of Solow model, it is expected that the economic retention rate is based on various aspects of the o rganization, including communication, information, and job satisfaction. Information is one of the several aspects which changes the level of job satisfaction and which leads to employee turnover rates that are within an economy. The information which is provided by organizations directly affects the Solow model, levels of performance and employee turnover rates. The qualitative and quantitative aspects of Solow model show how information is one of the main variables that links to communication, perceptions, turnover rates, and job satisfaction associated with an economy. The fact that Solow model is established on the theory of a closed economy (as indicated earlier) denotes every model has certain imaginary assumptions but could thrive if the final consequences are not subtle to the generalizations used. Besides the model recommended by Solow, there have been several efforts at building a growth model for an open economy. As indicated before, process evaluation is vital since it d eals with the active monitoring of the activities as well as inputs involved towards the achievement of both long-term and short term goals. The basic aim behind process evaluation is therefore to put the project processes under a streamlined and uniformly objective system of action. Therefore, process evaluation remains a critical monitoring approach that unlike both other types of evaluation occurs immediately after a project has been executed. The process occurs throughout the project phase and is basically the directing evaluative component of the program with a fundamental objective of putting the program into the proper channel (Gertler World Bank 2010). In perspective, Solow model offers a monitoring aspect to several economic projects and is carried out continuously. The process allows projects to identify and recognize the factors that are less pertinent, or the economic indicators of the project that may not be performing well. In the execution of model, the deviant facto rs or processes are identified and adjustments are conducted in the process to channel the program towards efficiency and success (Solow 1994). The basic objective here is to enhance the effectiveness as well as efficiency of the model. Thus, it is crucial to note that a project might go astray or lose its course of model if process evaluation components are not considered. This is because the short term outcome as well as the long term impact evaluations usually occurs after specified intervals while process evaluation is a continuous process right from the program initiation stage. Conclusion Solow model was developed to explain long-term national economic growth in a more precise manner. It is a unique theory and it varies from other economic development models since it comprises of several equations to illustrate how production, capital goods, working time, as well as investments influence each other. However there are several critics of this model. Some of the critics discussed here include; in Solow model, technological advancement is the only factor considered for long-term national economic growth but at diverse levels of revenue based upon investments and population growth, and another limitation of this theory lies in convergence of the progress of a national economy as discussed. Precisely, Solow model is one of the unique theories that explain the long-term national economic growth. In spite of its uniqueness, it has some significant limitations. The paper discussed the meaning and major limitations of Solow model with respect to theory and economic references. Agreeably, the Solow model enlightens long-term economic growth based on technological advancement, work, and majors on the national economy. List of References Bosworth, B Collins, S 2008, Accounting for growth: comparing China and India, Journal of Economic Perspectives, vol. 22, no. 1, pp. 45-66. 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