Which of the following is an implication of the Solow Growth Model regarding long-term economic growth?

Solution

The Solow Growth Model suggests several key points about long-term economic growth:

1. Diminishing Returns to Capital: As more capital is accumulated, the additional output produced from an additional unit of capital decreases. This means that simply increasing capital will not lead to indefinite growth.
2. Steady-State: In the absence of technological progress, the economy will eventually reach a steady-state where capital per worker and output per worker remain constant. This is because the depreciation of capital and the addition of new workers offset the effects of savings and investment.
3. Role of Technological Progress: For sustained long-term growth in output per worker, technological progress is essential. Without improvements in technology, economies will not be able to maintain growth in output per worker after reaching the steady-state.

• Option (a): Higher population growth rates typically dilute capital and reduce output per worker in the long-term steady state, contrary to the statement.
• Option (b): Higher savings rates can increase the steady-state level of output per worker but do not lead to indefinite growth since diminishing returns to capital will eventually set in.
• Option (c): This is correct. Technological progress is necessary for sustained long-term economic growth as it shifts the production function upward and allows for continuous growth in output per worker even after reaching the steady-state level of capital per worker.
• Option (d): Capital accumulation alone cannot sustain long-term economic growth due to diminishing returns to capital. Sustained growth requires technological progress.