Solow's Original Model versus Textbook Model
International Journal of Economics and Research (IJER), Volume 7, Issue 2, pp. 8-15, 2016
8 Pages Posted: 13 Jun 2016 Last revised: 29 May 2017
Date Written: 2016
The textbook explanation of the Solow model assumes implicitly that there are stationary, rather than steady-state, conditions. This study shows that the stationary-state conditions assumption is not compatible with the neoclassical postulate. The Solow model explains long term equilibrium at full employment. In the short-term economy is out-of-equilibrium. It is shown that if it is assumed stationary state conditions, there is no growth, saving propensity cannot change exogenously and transition from full employment to out-of-equilibrium conditions, and consequently from out-of-equilibrium to full employment conditions cannot be explained. Explaining the Solow model starting from stationary-state conditions prevents to understand the critical difference between classical and neoclassical economics.
Keywords: Solow Model, Neoclassical Economics, Steady State, Stationary State
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