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Solow growth model - Help!

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    Okay, so I'm really stuck on this question. I don't exactly understand the model, except that it demonstrates long term economic growth. Question (a) asks for its key assumptions - is this referring to diminishing returns to capital?

    Basically, I don't know what to write for 15 marks (out of 100). How would you outline the model concisely and what assumptions is the question alluding to?

    As for question (b), I'm completely lost.

    Please, any help would be much appreciated.

    Many thanks.
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    No economics experts around?
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    Ask me next year, and I'll answer :gah:
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    Well, we begin the Solow growth model by saying

    Y = AF(K,L), yeah?

    And then you assume it has constant returns to scale, such that output per worker = Y/L = AF(K/L, 1) = Af(K/L), i.e. output per worked is a function of capital per worker essentially. So constant returns to scale is our first assumption.

    Second assumption is that the savings rate is exogenously given (i.e. the model just take a given rate, it doesn't determine it/it isn't affected by our model).

    Another assumption is a closed economy (no exports/imports).

    There's one more I think but can't remember.

    Just look it up.

    If you can't answer part b then there's nothing we can really do to help you - go look at your notes/book.
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    (Original post by Swayum)
    Well, we begin the Solow growth model by saying

    Y = AF(K,L), yeah?

    And then you assume it has constant returns to scale, such that output per worker = Y/L = AF(K/L, 1) = Af(K/L), i.e. output per worked is a function of capital per worker essentially. So constant returns to scale is our first assumption.

    Second assumption is that the savings rate is exogenously given (i.e. the model just take a given rate, it doesn't determine it/it isn't affected by our model).

    Another assumption is a closed economy (no exports/imports).

    There's one more I think but can't remember.

    Just look it up.

    If you can't answer part b then there's nothing we can really do to help you - go look at your notes/book.
    Okay, that clears it up a little, thanks.

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