According to the Solow growth model, why do all countries tend to converge to a steady state?
Solow Model of Growth:- Prof. R.M. Solow makes his model of economic growth upon the Harrod-Domar model. It is the basic modern theory of economic growth.
The model:- In the model, Solow shows that there is same
tendency of capital-labor to adjust itself through time in the
direction of balance. He says that if the ratio of the capital to
labor is more, capital and output would increase slowly than
labor.
Solow take one compound commodity in the economy. And its yearly
rate of production is represented by Y(t), which represent real
income and part of it consumed and rest of it saved and
invested.
The steady state is the basic to comprehensing the Solow Model. At
the steady state an investment is equivalent to depreciation. That
means that all of investment is being accustomed to mend and
restore the existing capital stock.
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