Economics is a branch of business studies that explores ways of converting resources into finished products and services for human consumption. Therefore, it examines the processes involved in production, supply, and consumption of products and services. Economists define growth as an increase in quality or quantity of goods or services. Robert Solow presented various aspects of economic growth and how they affect each other using an economic model that explains their relationships (Andrew and Bernanke 23). This essay uses Robert Solow’s model to explain whether or not moderate growth is good for an economy.
Robert Solow’s Economic Growth Model
Robert Solow is a prolific economist that brought a new dynamic in explaining the factors that affect economic growth. He introduced a model that explains the impacts of new and old capital in developing economies and this is why his model is based on this factor of production and how it influences other issues (Williamson 81). His model is based on the need to improve capital, labour and technology to ensure economic growth is sustained. Solow believed that these aspects are important in determining a country’s economic growth; therefore, people should pay attention to them to ensure they sustain their economies.
Explanations in Relation to Economic Growth
There is the need for nations to ensure their economic growth rates are moderate because this is the only way of keeping track of what affects their development. Nations that do not have steady economic growth usually face an uncertain future because they are unable to plan for their projects. Robert Solow’s economic growth model uses three variables to explain how nations can develop without straining their financial positions.
He explains that there is the need to pay attention to the available capital a country uses in its development projects. In addition, he claims that there is the need to use modern technology to improve productivity relationships (Andrew and Bernanke 27). Lastly, his model stresses the need to ensure a country has a strong work force that will propel its economy to greater heights. These issues affect economic growth in the following ways.
A business has the material and financial capitals that ensure it operates without experiencing stoppages or other challenges. An investor must ensure that there is adequate capital before starting any business activity. Robert Solow explains that a business or country has two types of capital that must be operational to promote its growth. He claims that old capital is important in acquiring assets and financing other needs that are required by a business during its formation. Similarly, nations must have this capital to ensure they lay foundations for the future of their economies (Williamson 97). In addition, his model explains that this capital is not adequate to sustain economic growth and there is the need for investors and nations to pump additional capital in their projects. This is called new capital and is used to expand business operations and ensure nations and individuals sustain their business activities and improve their economies.
Capital per worker is also important because it ensures that employees improve their performance. This is shown in the graph below.
He uses this equation to explain that working capital deprecates and there is the need to increase it to manage the effects of diminishing returns on this factor of production.
Kt+1= Sy+ (1-d) Kt
This illustration explains the relationship between capital and its value after all other factors have played their roles in an investment. Solow explains that capital is not static and thus it requires regular servicing through the addition of more money in a business to ensure it works properly.
When a business or nation injects additional capital in its operations this means that there will be adequate stock and equipment that are required to facilitate various operations. In addition, this capital is used to conduct research, widen market penetration and improve the existing advertisements. Moderate growth ensures a business injects additional capital to its operations to promote its activities and safeguard it against depreciation relationships (Andrew and Bernanke 36). Therefore, Solow’s model proves that businesses should have moderate growth rates to ensure their capitals are not exhausted due to inflation and lack of new capital.
Poor countries are encouraged to have moderate growth rates to ensure they can provide reasonable new capital to their projects. This may not be applicable in developed nations since they already have adequate capital to replace the old one. There is the need to ensure nations invest in activities they can manage because some projects require a lot of money to sustain than establish them (Williamson 103). This means that investors should not rush to start projects they cannot sustain. Solow’s model explains that new capital is as important as the old one because it ensures a business does not collapse due to capital depreciation. This means that new capital rejuvenates businesses and ensures there is continuity in their operations relationships (Andrew and Bernanke 43). The graph below shows the impacts of additional capital on improving technology and managing the effects of population increase.
In addition, he explains that there is the need to accumulate capital to ensure a business knows its abilities to expand various operations (Williamson 115). For instance, it is impossible for businesses to grow if they cannot accumulate their capitals. This means that capital accumulation is an important aspect of growth since it determines future investments. Moderate growth cannot be achieved if a business is unable to accumulate its capital because this will mean that it is unable to generate returns on its investments (Smith 65). Solow explains that developed and developing nations show similar characteristics in terms of growth rates if they can accumulate their capitals and inject new ones in their investments.
The neoclassical growth models explain that the economies of poor nations converge with those of rich ones when their rates of savings and investments are similar. Therefore, moderate growth is good for the economy because it is an effective way of knowing whether a business is making profits or losses.
Technology is an important aspect of development and all nations must ensure they adopt this new development. It is necessary to explain that most people invest in modern technology to improve the quality of their products and services. However, they cannot do this in isolation because their competitors are also keen and do whatever is necessary to make their operations relevant. Technology ensures there is high efficiency and quality in service delivery and this is an important aspect of development. Consumers prefer goods that have been produced using modern technologies so that they can satisfy their preferences. The graph below shows consumption path that is marked by the need to use improved ways of doing things to ensure investors attract customers.
Investors that do not use modern technology cannot compete with similar operators because they will be disadvantaged when it comes to efficiency and quality. Solow explains that technology is an indispensable aspect of development since it attracts consumers, reduces costs and promotes the production of high quality goods (Williamson 121). Therefore, he argues that investors that ignore this important aspect of business operations should not consider themselves being in a competition because they will have no grounds when it comes to quality and efficiency.
He claims that technology evolves depending on the needs of the population and this means that people should not stick to a particular way of production. Changes in tastes, preferences, likes and dislikes compel investors to adopt modern technology to ensure they provide goods that satisfy the needs of their clients (Smith 68). Therefore, investors should not use a particular technology for a long time because it will be outdated and unable to compete with similar operators.
Solow argues that technology determines the level and quantity of production and thus investors must use modern technology to improve their services. This means that a business cannot grow if it uses poor technology in its operations. Solow claims that an increase in production or service delivery means a business is expanding its operations and thus there is the need to ensure that old machines are replaced with new ones that are efficient and faster (Williamson 125).
This explains why developed nations consider servicing and repairing of machines an important way of boosting their operations. Old machines are not effective because they consume a lot of energy and may slow some processes. These and other inconveniences are to blame for chasing away customers because they are time and quality conscious.
A business that uses efficient technologies can save a lot of money because it does not require fixing broken machines or replacing old parts. In addition, some machines like computers can multitask and this means that the business saves money that would have been used to employ workers. In addition, companies should ensure they use equipment that do not consume a lot of fuel or electricity.
This means that they should look for machines that save energy to ensure they reduce unnecessary expenses. Solow claims that a company does not need to buy a new machine if the present one is offering good services (Smith 78). However, if an investor wishes to get new machines he can do this by upgrading old ones or purchasing new equipment. This will minimise expenses on machines and ensure the company saves a lot of money that will be used to expand the operations of a business and ensure it has moderate growth.
This is an important factor of production and it determines the level of goods or services a business can offer to the public within a specified period. It is necessary to invest in efficient labour to ensure a company gets positive results from its sales and advertisements. Necessary to explain that most companies fail to achieve their objectives because they do not have recruitment policies that ensure they get qualified workers. Solow argues that the ability, experience, skills, interest and academic qualifications of workers determine their output (Williamson 133).
This means that there is the need to recruit workers that show the potential of better performance to increase chances of improving the quality of services and goods produced by a company. There is the need to hire qualified workers to ensure a business has higher chances of achieving its objectives. Solow uses the illustration below to show that workers’ output determines the growth rate of a business and thus there is the need to maintain high professional performance to ensure an investment records steady improvement.
y = Y / L*E = f (K/L*E, L/L*E) = f (k)
This illustration shows that professional workers are capable of producing good results compared to untrained ones. Therefore, this means that businesses should invest in training their employees to ensure they equip them with the necessary skills to do their jobs. Solow claims that workers should be trained on a regular basis to ensure their skills are refreshed and that they gain new knowledge about modern technology and other aspects that affect their operations.
Nations should invest in establishing schools and training centres where their youths will get skills on various professions. Most nations spend a lot of money hiring expatriates from other countries and this is a waste of resources.
Therefore, Solow proposes that investing in learning institutions may have immediate losses due to inadequate resources but this has a long term effect that will ensure nations develop without depending on others for professional support (Smith 79). Education is a lifetime resource that expires when a person dies. This means that investors must train their employees and take them for workshops to ensure they gain relevant skills to ensure their businesses grow steadily. The diagrams below show different relations between education and the ability of workers to perform better.
Developed and developing nations have experienced significant changes since the development and use of modern technology. They invest in learning institutions to equip their citizens with skills and knowledge that will be applied in uplifting their economies. The presence of various local and financial money lending institutions support various business operations to boost their performance. These aspects are important in ensuring that investors record steady growth that is good in economies. Therefore, moderate growth is good for an economy because it gives investors time to adjust to technological, professional and financial challenges that face them.
Andrew B. Abel and Ben S. Bernanke. Macroeconomics. Boston: Addison-Wesley, 2005. Print.
Smith, Stephen. Economic Growth: Unleashing the Potential of Human Flourishing. New York: Wiley, 2011. Print.
Williamson, Stephen. Macroeconomics. Boston: Addison-Wesley, 2010. Print.