The Solow Model

The aim of economic growth theory is to explain the causes that determine the level and the growth rate of labor productivity. This theory must be able to explain Kaldor’s stylized facts: (i) the productivity of labor has been growing systematically; (ii) the capital-to-labor ratio has been growing over time; (iii) the rate of return on capital has been reasonably constant; (iv) the capital-to-output ratio has not changed over time; (v) the shares of labor and capital in output have not been showing upward or downward trends; (vi) the growth rate of the productivity of labor has been varying from one country to another. The Solow model introduced in this chapter attempts to reproduce these facts.