Countries only differ from one another along one single dimension: capital/worker.
- Production function is the same.
- Labour is constant.
- Δk=γf(k)-δk where i=γy (i.e. fraction of gdp invested) and d=δk (which is the fraction of depreciation)
- Steady states
capital = f(investment)=f(savings)=f(poverty?
- Theory of income differences - taken alone, and assuming similar technology levels, Solow model has only limited explanatory power with a correlation of 0.17.
- Why investment differ? Although international flows matter, savings matter more.
- Theory of relative growth rates - convergence to steady state (at a decreasing rate)
- 2 countries have same γ but different y, country with lower y will have higher growth.
- 2 countries have same y but different γ then higher γ higher growth
- If a country increases its level of investment it will increase its rate of income growth.