Here's a quick growth conundrum, to get you thinking. Consider two countries at the close of World War II—Germany and Japan. At that point, they've both suffered
Here's a quick growth conundrum, to get you thinking.
Consider two countries at the close of World War II—Germany and Japan. At that point, they've both suffered heavy population losses. Both countries have had their infrastructure devastated. So logically, the losing countries should’ve been in a post-war economic quagmire.
So why wasn't that the case at all?
Following WWII, Germany and Japan were growing twice, sometimes three times, the rate of the winning countries, such as the United States.
Similarly, think of this quandary: in past videos, we explained to you that one of the keys to economic growth is a country's institutions. With that in mind, think of China's growth rate. China’s been growing at a breakneck pace - reported at 7 to 10% per year.
On the other hand, countries like the United States, Canada, and France have been growing at about 2% per year. Aside from their advantages in physical and human capital, there's no question that the institutions in these countries are better than those in China.
So, just as we said about Germany and Japan - why the growth?
To answer that, we turn to today's video on the Solow model of economic growth.
The Solow model was named after Robert Solow, the 1987 winner of the Nobel Prize in Economics. Among other things, the Solow model helps us understand the nuances and dynamics of growth.
The model also lets us distinguish between two types of growth: catching up growth and cutting edge growth. As you'll soon see, a country can grow much faster when it's catching up, as opposed to when it's already growing at the cutting edge.
That said, this video will allow you to see a simplified version of the model. It'll describe growth as a function of a few specific variables: labor, education, physical capital, and ideas.
So watch this new installment, get your feet wet with the Solow model, and next time, we'll drill down into one of its variables: physical capital.