Solow-Swan Growth Model
Capital accumulation, diminishing returns, and the steady state, why saving alone can't drive growth forever.
The Solow-Swan Growth Model model, in writing
Definition
The benchmark growth model: output per worker depends on capital per worker, capital accumulates from saving but suffers depreciation and dilution, and the economy converges to a steady state.
Δk = s·f(k) − (δ + n)·k ; steady state where s·f(k*) = (δ + n)·k*
The intuition
Piling up capital hits diminishing returns: each extra machine adds less output than the last, so saving alone cannot power growth forever. In steady state, investment just covers wear-and-tear and population growth. Sustained growth in living standards must come from technology, the one input that never runs into diminishing returns.
Exam tip
A higher saving rate raises the LEVEL of steady-state income but not the long-run growth RATE. Confusing level effects with growth effects is the classic Solow mistake.
Related models in Advanced Macro & Growth