... all these questions, then, we should begin looking at the Solow model. To construct his model Solow departs from the neo-classical production function. Yt = F(Kt, AtLt) * we will omit the temporal notation for the moment It basically focuses on four variables: - Output (Y) - Capital (K) - Labour (L) - Knowledge (A) Main assumptions He then makes some assumptions: - That the two components of the production function (capital and effective labour) have constant returns to scale to. Then labour and knowledge both grow exogenously at rates n and g respectively. So the number of effective units of labour AL will grow at rate n+g. - That inputs other than capital, labour and knowledge are unimportant. - That the fraction of output invested (or saved) is constant and equal to s (Closed economy) General solution The first assumption implies that Y = F( cK, cAL) = cF( K, AL) If we take c = 1/AL: Y/AL = F( K/AL, AL/AL) = F(K/AL, 1) = ...

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