China's Economic Growth Appraisal through the Solow Model Research Paper

China's Economic Growth Appraisal through the Solow Model - Research Paper Example The short term implications include policy measures such as tax cuts as well as subsidies on investment that could affect the steady state levels of output but not the growth in the longer run. Furthermore the growth is affected in the shorter run only because the economy converges to newer steady state levels of output. In addition the rates of growth of the economy as the economy converges to a steady state are determined by the rate of capital accumulation alone. The rate of capital accumulation is the determined using the savings rate as well the overall depreciation of capital. In contrast the long term implications of the Solow model imply that the long term rate of growth can be determined exogenously only. A common method of predicting implies that an economy will tend to converge towards a steady state rate of growth depending only on the rate of labor force growth and the rate of technological progress. The Solow model accommodates for higher saving rates producing higher growth rates much like older models but it appreciates technological innovation more in the longer run compared to accumulation of capital. The key assumption of the Solow growth model is that the involved capital is subject to the law of diminishing returns within a closed economy. Mathematically the Solow model is represented through the interaction between five macroeconomic equations for GDP, change in capital, the macro production function, savings and changes in the workforce. These functions can be represented mathematically as below (Haines). Function Mathematical Expression M acro-production Function Savings Function Changes in Capital Changes in Workforce Where:  is the total production of the economy  is the multifactor productivity or technology  is the capital  is the labor  is the savings  portion of total production which represents savings  is the depreciation  is the net growth rate  is the time 2. China’s Growth as per the Solow Model The Solow model has been used extensively in various forms in order to decipher national growth in the longer run utilizing exogenous perspectives. The basic key assumption remains the same as above which is the diminishing returns of the capital within a closed economy model. Moreover the textbook Solow model relies on exogenous rates for capital accumulation, technological progress and population growth. The overall economic growth in the longer run is estimated exogenously through relying on the rate of technological progress as stipulated in the discussion above. However the basic textb ook Solow model cannot reliably predict economic growth so it is often augmented with structural terms. This text will not deal with the derivation of the Solow model’s mathematical implications as it is beyond the scope of this text but instead it will report on the primary equations utilized for the Solow model. The derivation for the mathematical expressions used in the Solow model can be retrieved from various economics studies relating the Solow model to economic growth (Ding and Knight) (Temple and Wobmann). Based on these researches the primary equations in use are: The equations listed above accommodate for structural changes, efficiency of the economy, changes in labor patterns, technological changes as well as residuals required for convergence. The model listed above was used along with panel data from a variety of sources such as PWT (Penn World Table), WDI (World Bank Development Indicators), and FAO