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Objective

Explains positive long-term growth in per-capitavariables only through some type of exogenousgrowth in productivity

ASSUMPTIONS OF THE MODEL

1. Continuous time.

2. Single good produced with a constant

technology.

3. No government or international trade.

4. All factors of production are fully employed.

5. Labor force grows at constant rate n such that

6. Initial values for capital, K0

and labor, L0

given.

Y =Af(K,L) (production function)

Y = GDP,A= technology,

K= capital,L = labour

SOLOW GROWTH MODEL

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Solow-Swan assume:

diminishing returns to capital or labour (the lawof diminishing returns), and

constant returns to scale (e.g. doubling Kand L, doubles Y).

For example, the Cobb-Douglas production function

1

1

where 0 1Y AK L

Y AK L AK K y A Ak

L L L L

Hence, now have y= output (GDP) per worker as function of capital to labour ratio (k)

Solow noted that any increase in Q could come from one of three sources:

Increase in L . However, due to diminishing returns to scale, this would imply a reduction in Q / L oroutput per worker.

Increase in K . An increase in the stock of capital would increase both output and Q / L

Increase in A or in multifactor productivity could also increase Q / L or output per worker.

NEOCLASSICAL PRODUCTION FUNCTIONS

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Indias Savings Rate (2012) 30% of GDP and US17% of GDP

Assuming rate of depreciation to be 4% for both

India and USA * Productivity per worker: India 0.35, USA 1

SIMULATING SIMPLE SOLOW MODEL

* Source: http://www-personal.umich.edu/~kathrynd/india.2005.pdf

http://www-personal.umich.edu/~kathrynd/india.2005.pdfhttp://www-personal.umich.edu/~kathrynd/india.2005.pdfhttp://www-personal.umich.edu/~kathrynd/india.2005.pdfhttp://www-personal.umich.edu/~kathrynd/india.2005.pdf

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INDIA USA

GROWTH ANALYSIS

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Gross Domestic Product GDP Growth Rate

The Gross Domestic Product (GDP) in India was worth 1841.70 billion US dollars in 2012. The GDP value of

India represents 2.97 percent of the world economy

From 1970 until 2012, India GDP averaged 485.7 USD Billion reaching an all time high of 1872.9 USD Billion in

December of 2011 and a record low of 63.5 USD Billion in December of 1970.

India's economic growth accelerated slightly last year to more than 5%, but the nation continues to struggle

with a weak economy and high inflation.

A mix of problems including chronic fiscal and current account deficits, shoddy infrastructure and rising

borrowing costs have hurt business confidence in India and choked investments over the past few years.

ECONOMIC GROWTH

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Savings (as % of GDP) Research and Development (as % of GDP)

Gross domestic savings have increased continuously

from an average of 9.6 per cent of GDP during the

1950s to almost 28 per cent of GDP in 2012. It

peaked at 34% in 2007.

Savings as a % of GDP has shown a steady decline in

USA since the 1980s Great Moderation made

people less fearful of economic uncertainty

Indian economic growth has been financed

predominantly by domestic savings whereas the

foreign savings have remained modest in Indian

growth period

India lags far behind in the field of scientific research

and development globally which is led by USA.

While USA has consistently spent around 2.5% of its

GDP on Research and Development, the figure for

India has been below 1%.

This is the reason forUSAs

technological progressand thus translates into better factor productivity.

Hence, India lags behind USA on this metric of

economic growth according to Solow Model.

COMPARATIVE ANALYSIS

Low R&D expenditure can lead to: (a) Lack of innovation and discovery of new techniques which can power the

economy (b) The productivity of labour (people) remains low as their skills may not be fully utilized due to lack ofaccess to research tools and techniques.

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Health expenditure (as % of GDP) Public Spending on Education (as % of GDP)

There has been a steady fall in public spending on

education in India which accounted for 3.35% of

GDP in 2012.

Public expenditure on Education across the world

witnessed a steady rise and increased to 5%. Going

with the trend, USAsspending on education steadily

increased to reach 5.42% in 2010.

Indias health expenditure at 4% is considerably

below the global average of 10%, and shows a

declining trend.

On the other hand, USAsexpenditure on health has

shown an increasing trend and is well above the

global average at almost 18%.

USA ranks considerably higher at 4 on HDI as compared to Indias 135. USA scores high on human development

index as the average achievement in three basic dimensions of human developmenta long and healthy life,

knowledge and a decent standard of living is high in case of USA.

COMPARATIVE ANALYSIS

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CAGR- 6%

Agricultural Value Added per worker- USA

The Agriculture Growth rate in India has

been high at a CAGR of 6% for USA havingsustained for the past 20 years

Some of the reasons for this are disruptive

innovation in farm technology, better

pricing and direct access to wider and

more competitive market

COMPARATIVE ANALYSIS AGRICULTURE

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CAGR- 2%

Agricultural Value Added per worker- INDIA

The Agriculture Growth rate in India has been low at

a CAGR of 2%

Technological challenges, land fragmentation, lack

of nonfarm services, institutional factors and

demographic pressure are the reasons attributed

to the same

Majority of the population is employed in the

agriculture sector although this trend has shown asteady decline over the past few years.

But the value added per worker is lower than the

USA and stands at less than 700 as compared to

USAs50,000

One of the major reasons for the same can be that

output per worker increases at a diminishing rate as

k increases due to the law of diminishing returns.

In the absence of continuing improvements in

technology, growth per worker must ultimately

cease. This prediction follows from the assumption

of diminishing returns to capital.

COMPARATIVE ANALYSIS AGRICULTURE