Technology, Empirics, and Policy

Technological Progress in the Solow Model
the Solow model has assumed an unchanging relationship between the inputs of capital and labor and the output of goods and services. Yet the model can be modified to include exogenous technological progress, which over time expands society’s production capabilities.
-The Efficiency of Labor
The efficiency of labor is meant to reflect society’s knowledge about production methods: as the available technology improves, the efficiency of labor rises, and each hour of work contributes more to the production of goods and services.
The Effects of Technological Progress
-Balanced Growth
According to the Solow model, technological progress causes the values of many variables to rise together in the steady state. This property, called balanced growth, does a good job of describing the long-run data for the U.S. economy.
-Convergence
The Solow model makes clear predictions about when convergence should occur. According to the model, whether two economies will converge depends on why they differ in the first place. On the one hand, suppose two economies happen by historical accident to start off with different capital stocks, but they have the same steady state, as determined by their saving rates, population growth rates, and efficiency of labor.
-Factor Accumulation Versus Production Efficiency
the efficiency with which economies use their factors of production. That is, a worker in a poor country may be poor because he lacks tools and skills or because the tools and skills he has are not being put to their best use.
Policies to Promote Growth
the Solow model to uncover the theoretical relationships among the different sources of economic growth
-Evaluating the Rate of Saving
the Solow growth model, how much a nation saves and invests is a key determinant of its citizens’ standard of living.
-Changing the Rate of Saving
The most direct way in which the government affects national saving is through public saving—the difference between what the government receives in tax revenue and what it spends. When its spending exceeds its revenue, the government runs a budget deficit, which represents negative public saving.
-Allocating the Economy’s Investment
The Solow model makes the simplifying assumption that there is only one type of capital. In the world, of course, there are many types. Private businesses invest in traditional types of capital, such as bulldozers and steel plants, and newer types of capital, such as computers and robots.
-Establishing the Right Institutions
As we discussed earlier, economists who study international differences in the stan- dard of living attribute some of these differences to the inputs of physical and human capital and some to the productivity with which these inputs are used. One reason nations may have different levels of production efficiency is that they have different institutions guiding the allocation of scarce resources.
Beyond the Solow Model:Endogenous Growth Theory
Modern theories of endogenous growth attempt to explain the rate of technological progress, which the Solow model takes as exogenous. These models try to explain the decisions that determine the creation of knowledge through research and development.

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