Solow Growth Model

Robert Solow won the Nobel Prize in Economics in 1987 for his work in providing a framework and theory with which to think about all aspects of economic growth.

This simulation provides a simplified way to think about economic growth and how savings, depreciation, and population growth – or more precisely, the resulting growth in the labor force – all affect growth.

It is important to recall that in the Keynesian model, Saving = Investment = Business Spending. Depreciation is the using up of Investment. This model shows investment growing by the rate of saving and shrinking by the rate of depreciation. In our economy, consumers save about 5% of their income, while businesses tend to "save" (read: invest) more. Some societies save up to 15% of their income!

Once you have downloaded the software to your desktop, open the simulation and read the introduction. Experiment with each slider, examining what happens when depreciation increases or decreases or population increases or decreases. Look at the rate of saving slider, too, and note that .05 is 5%.

The model shows the relationship between capital/worker and economic growth. Remember this is a very general conceptual model and only shows general trends and possible issues that a growing economy could encounter.

As you examine various scenarios and their overall consequences, think of where the US may fit within the conceptual framework. Are we re-investing too little? Are we replacing capital as it depreciates or just consuming that capital with little thought of replacement?

Back up with your claims with evidence from the simulation and background from the other course resources. Consider posting your conclusions in the course discussion forum, and be prepared to defend your position!