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Solow growth model

A model that explains economic growth through the accumulation of capital. The Solow growth model assumes that output is produced using capital and labour with constant returns to scale. Output is either saved or consumed. The capital stock is the accumulated saving of previous periods less depreciation. Labour supply is fixed, and saving is a fixed fraction of output. Assume the economy is in an initial position with a low capital stock. In every period saving will increase the capital stock until the steady state is reached in which saving is equal to depreciation. Along the path to the steady state consumption per capita will increase and the economy will experience growth. Once the steady state is reached consumption per capita remains constant, and so growth ceases. Further growth can only occur if there is some exogenous change, such as technological improvement, that raises the level of output for any given inputs.

Reference: Oxford Press Dictonary of Economics, 5th edt.