The Standard Growth Model and theory of economic growth

The Standard Growth Model:

Economists begin to analyze long-run growth by building a simple, standard model of economic growth—a growth model. This standard model is also called the Solow model, after Nobel Prize-winning M.I.T. economist Robert Solow. The second thing economists do is to use the model to look for an equilibrium--a point of balance, a condition of rest, a state of the system toward which the model will converge over time. Once you have found the equilibrium position toward which the economy tends to move, you can use it to understand how the model will behave. If you have built the right model, this will tell you in broad strokes how the economy will behave.

In economic growth economists look for the steady-state balanced-growth equilibrium. In a steady-state balanced-growth equilibrium the capital intensity of the economy is stable. The economy's capital stock and its level of real GDP are growing at the same proportional rate. And the capital-output ratio--the ratio of the economy's capital stock to annual real GDP--is constant.

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