Managerial Economics: Solow Model, Growth, and Prosperity Analysis

This essay explores the Solow model as a substitute for the Harrod-Domar model, focusing on long-term economic growth. It discusses the model's assumptions, including constant growth rates of knowledge and labor, and the impact of investment and output on economic growth. The essay also examines the concept of prosperity without growth, noting that it can occur when wealth is unevenly distributed, leading to unemployment for a significant portion of the population. It identifies factors limiting actual growth in developed countries, such as lack of transparency, corruption, and complexity in government programs. The essay concludes that a fast-growing economy requires balanced growth across all factors of production, including output, labor, and capital, and that business failures and population explosion can hinder economic prosperity. Desklib offers similar essays and study tools for students.

MANAGERIAL ECONOMICS

Managerial Economics 1
Contents
Introduction...........................................................................................................................................2
Solow model..........................................................................................................................................3
Assumptions......................................................................................................................................3
Growth without prosperity....................................................................................................................4
Reasons behind ostensibly in developed countries and limits the actual growth.............................4
Conclusion.............................................................................................................................................5
References.............................................................................................................................................5

Managerial Economics 2
Introduction
Growth comes through adding more labour and capital (even in form technology). It
has to make contribution to understand all the factors of production determining the capacity
of the country. Moving to consider long term factors associated with the business is
necessary. Lying on short term production curves for solution will not pay much. The
business are growing long term.

Managerial Economics 3
Solow model
The Solow model was propounded by prof. Robert Solow as a substitute to Harrod-
Domar model of sustainable growth. Harrod-Domar focuses on short run period whereas,
Solow model ensures long term growth. Solow regulates fast growth in the long term without
any falls. The short term is based on unrealistic assumptions such as capital, output, fixed
factors and variable factors. Invention of Solow model leads to economic growth (Frey,
2017). If the methodological factors of production like variable factors, capital factors and
labour factors adjust them to equilibrium in a particular time. It has basic some sources for
GDP – labour, capital and knowledge (Maynard, 2016).
Assumptions
 The growth rate of both knowledge and labour is constant. Some part of production is
saved as investment and rate of depreciation is fixed.
 Investment and output affects the growth of economy.
 This model focuses on capital gathering in a production economy because it is
interested in real income. Consumers save a part of their real income as savings.
Those savings are invested as whole (Frey, 2017).
The savings is all again into the economy in form of investment. Investment results to
capital gains which increases the living standard of the people increases.
Assumption for a example- There are only consumer and firm in an economy. All firms are
owned by people. Consumers creates no savings. The whole output is consumed.
Y (income) = output (aggregate demand)
Total Consumption= Y*output

Managerial Economics 4
Prosperity without growth
Prosperity is term which is considered to be successful for flourishing economy. One
way of measuring prosperity is visible when gross domestic product is growing. Other way is
full employment and savings further leading to investment (Jackson, 2016). If the GNP (gross
national product) is not growing. It indicates that unemployment is prevailing in the
economy. In prosperous economy, people tries to increase the wealth through investing in
abroad for long term capital gains and also hold a stake in foreign company. Today`s world
demands consumption based economic growth will comfortable equity stake. It is assumed
that economic prosperity necessitates growth (Jackson, 2009). Growth enters through
expansion and development. An open economy facilitates both expansion at international
level and developing the products as per the requirement of the customer. Through variety in
demand of different cultured people leads to diversification in production (Jackson, 2018).
Prosperity without growth in a country occurs when a part of population is extremely rich.
Others are suffering from severe unemployment.
Reasons behind ostensibly in developed countries and limits the
actual growth.
 Lack of transparency- government regulates many policies. But sometimes it becomes
very difficult to aspect the outcome which government is expecting from such
programmes.
 Corruption- some political leaders work only for self-interest. Although they should
work for the public interest. They hamper the system.
 Complexity- Many programs are launched to benefit the economy. But sometimes it
fails and the outcome becomes zero.

Managerial Economics 5
Conclusion
A fast growth economy is attained when all the factors of production like output,
labour and capital are growing at the same pace. A developed economy requires an addition
of full employment and high level of investment. Business failures and lack of opportunities
do not allow to prosper. By population explosion, absorbing resources to meet the needs of
the population becomes necessary.

Managerial Economics 6
References
Frey, E. (2017). The Solow Model and Standard of Living. Undergraduate Journal of
Mathematical Modeling, 7(2).
Jackson, T. (2009). Prosperity without growth: Economics for a finite planet. UK: Routledge.
Jackson, T. (2016). Prosperity without growth: foundations for the economy of tomorrow.
UK: Taylor & Francis.
Jackson, T. (2018). Prosperity without growth? The transition to a sustainable economy.
Retrieved from:
http://www.sd-commission.org.uk/data/files/publications/prosperity_without_growth_
report.pdf
Maynard, N. (2016). Long‐Run Growth Differences and the Neoclassical Growth Model.
Review of Income and Wealth, 62(3).