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The Solow Growth Model: Economic Growth of Australia

MBS686 Economics and Business Strategy

Murdoch University


Assessment details

Assessment 1: Mid-semester (in-class test). This in-class test is designed to assess student understanding of the learning outcomes listed for each topic covered and is designed as formative assessment. It will be a 1 hour closed-book test. The test is divided into two sections with a total mark of 20%. Section A (worth 5%) is made up of 5 multiple choice questions. Students are required to answer ALL questions in this section. All questions in Section A carry equal weight (1% each). Section B (worth 15%) is short answers type. Students are required to answer TWO questions in this section out of a choice of 5 questions. All questions in Section B carry equal weight (7.5 % each).

Assessment 2: Research Project. This assignment is designed to develop skills in assessing market information and presenting clear written communication about economic outcomes in markets, as this is an important employability skill. Choose one of the followings:

Report Topic 1. Ma Nuo, a 22 year old model from Beijing, said:

I’d rather cry in a BMW than laugh on a bicycle.

The truth is that Ma is far from alone in her material requirements for marriage. Millions of Chinese women, and their parents, are like her.

You are hired by a marketing agency to write a report on what motivates people to consume (impulsive and compulsive consumption). You discover that the consumer choice theory has something to say about our consumption behaviours. Below are 8 concepts that are related to the consumer choice theory. Choose any three concepts. Write your report defining and explaining the importance of each of the chosen concept. Each concept essay should not exceed 800 words (or 2400 words in total for the three concepts).

  1. Indifference curves
  2. Axioms
  3. Consumer equilibrium
  4. Income consumption curve
  5. Price elasticity of demand
  6. Income effect
  7. Consumer surplus
  8. Compensated demand curve

OR

Report Topic 2. Pick a country. Use the Solow growth model to analyse the impact of innovation and technological progress on the economic growth of the country of your choice. Your analysis should not exceed 2400 words.

Assessment 3:Presentation of findings of the research project.

Examination (Assessment 4)

Two hours closed-book examination (50%). Students are required to answer Three (3) questions only out of a choice of Seven (7) questions. All questions carry equal marks (16.66% each). Further information will be provided on the final exam towards the end of semester.

Determination of the final grade

Your final result for the unit will be reported by the following letter grades.  Note that marks may be scaled to ensure equity of marking by different tutors and across assignments of varying difficulty.



Grade
Notional Percentage
HD
High Distinction
Exceptional performance indicating complete and comprehensive understanding of the subject matter; genuine mastery of relevant skills; demonstration of an extremely high level of interpretative and analytical ability and intellectual initiative; and achievement of all major and minor objectives of the subject. 

80-100
D
Distinction
Excellent performance indicating a very high level of understanding of the subject matter; development of relevant skills to a very high level; demonstration of a very high level of interpretive and analytical ability and intellectual initiative; and achievement of all major and minor objectives of the subject. 

70-79
C
Credit
Good performance indicating a high level of understanding of subject matter; development of relevant skills to a high level; demonstration of a high level of interpretive and analytical ability and achievement of all major objectives of the subject; some minor objectives not fully achieved.

60-69
P
Pass
Satisfactory performance indicating an adequate understanding of most of the basic subject matter; partial development of relevant skills; adequate interpretive and analytical ability and achievement of all major objectives of the subject; failure to achieve some minor objectives.

50-59
N
Fail
Unsatisfactory performance indicating an inadequate understanding of the basic subject matter; failure to develop relevant skills; insufficient evidence of interpretive and analytical ability; and failure to achieve major and minor objectives of the subject.
    0-49


Answer

THE SOLOW GROWTH MODEL TO ANALYSE THE IMPACT OF INNOVATION AND TECHNOLOGICAL PROGRESS ON THE ECONOMIC GROWTH OF AUSTRALIA

Introduction

Here it has been evident that the slow growth model is a long run economic growth model.  The model is based on the Harrod Domer model.  The development in the model is based on the attainment of the production that the country has been able to attain.  The important factors in the model is the savings rate that the country has been able to experience. The technological progress is an important part that helps a country to experience growth. In an similar manner it needs to be stated that this helps countries attains higher level of growth. In this regards it needs to be stated that innovation also plays an important factor in this context.  In discussing the Solow growth model in terms of the technological progress and the innovation that the environment in the company can harbor, stating the economic condition would be important. 

Investigation in the Australian economy has provided inferences that the national gross domestic product (GDP) for the year 2017 has been 1.235 trillion US$.  It has been evident that the GDP has consistently increased in the last three years. It needs to be also stated that the increase in the GDP has been slight but consistent over the period of time (The World Factbook — Central Intelligence Agency, 2018). This is the characteristics that is generally portrayed by the developed by the developed world.  The GDP of a developed country like Japan or United Kingdom portray similar trends. The GDP growth for the countries have been slender because of the growth the countries have already experienced in their initial phases. The GDP growth for Australia in the 2017 fiscal year has been 2.2%. The growth rate that the country has experienced can be stated to be modest.  The per capita income for the country is around 49,900 US$ it has been similar to that of Japan but the per capita income in the Australia has been higher by roughly 1500 dollars (The World Factbook — Central Intelligence Agency, 2018).   In this regards, it needs to be further stated that considering the savings culture evident in the economy would be an important factor in carrying out the entire discussion. It has been evident that the gross savings rate in the country has been 22.3% of the total GDP in the fiscal year 2017 (The World Factbook — Central Intelligence Agency, 2018). The gross savings rate in the country has helped in funding the investment.  Here it has been evident that the savings rate in the country is comparably less as compared to that of the others.  

Relevance of Technology and innovation in the progress of economic growth in the country based on the Solow growth model

 

In comparing the  economic growth of Australia in terms of the Solow model it has been evident  that model is centered around the achievement of the steady state by the country. In order to achieve the steady state it needs to be stated that the country needs to equilibrate its levels of depreciation and the investment in replacing the capital. This is state at which the country the diminishing returns to the factors has been apparent.  It needs to be stated that an unit of investment  would not be able to bring the  same rate of return that it used to.  Every additional unit of investment beyond the point would result in capital depreciation.  In discussing about the Solow Growth model it needs to be stated that the concept of the golden rule would also be important at the golden rule level he capital accumulation is at its maximum.  This is the level at which the slope of the depreciation curve become equal with the total productivity curve.  The graph below would explain the phenomenon (Dalgaard & Strulik, 2013). 


Solow Growth Model

Figure1: Solow Growth Model

Source: Authors Creation

It would be essential to describe the diagram below.  The line labeled Y= f (k) represents the production function for the country. The line labeled as the s f (k) is the line representing the investment in the country.  Moreover, it needs to be stated here that the horizontal axis represents the capital per worker. The vertical axis represents the output per person or it can be stated that it represents the income per person.  The K** represents the level at which the capital accumulation is at its maximum. The slope of the product at this point is at its maximum. K* is the steady state at which the depreciation equals the investment. It has been evident from the graph that at the productivity is at its maximum. Here it also becomes evident from the above diagram that investing beyond this point would result in capital dissipation. It needs to be stated that the productivity beyond this point would also decrease (Solow, 1956).  This because of the diminishing returns of the factors.

 Under investigation it has been evident that the Australia is among the developed nations. The per capita income and the gross domestic product of the country reflect the same.   It has also been evident that the country must have reached the steady state at certain points of time.  It also becomes evident in this context that the technological progress and the population growth in the  country has shifted the steady state and the golden rule level of the country by  changing  the  slope of the depreciation line the investment line and the production function.   From the demographic study conducted on the country it has been evident that the country is in the third stage of demographic transition and has been represented by a low birth rate and the low death rate. Therefore it can be stated here that that the population growth for the country would be minimal (Jones, 1995). 

       The growth phenomenon for the developing country

Figure2: The growth phenomenon for the developing country

(Source: Author’s Creation)


The above diagram states the effect of increase in the population growth has on the economy. It has been that an increase in the population has the potential shifting the depreciation line in an upward direction.  In this regards it needs to be stated this would alter the steady state for the country.   the shift would be from K* to K*’. This would not only change the level of the country reaching the steady state but also alter the golden rule level of capital.  In the above diagram it has been evident that the  new golden rule state  would be attained at the point represented by the tangency of  blue dotted line  and the production function. Here it also becomes evident at this level the capital accumulation for the country would be maximum.  It also needs to be stated at the golden rule states that the diminishing factors of the country have not kicked in. It needs to be stated in this context that the above case represents the case of developing or a under developing country (Gillis et al. 2012).  This is because the growth in the population cannot be compensated by the technological progress or innovation.  The magnitude of the population growth would offset the technological progress and the innovation.  The population growth is huge for such countries on the contrary the technological progress for the country is minimal.  The reason can be attributed to the low saving and investment rates, which would help in encouraging innovation or technological progress.  

Here it has been evident that the shift in the steady state to lower equilibrium would also result in a lower availability of the capital per capita   and would also reduce the productivity in the country.  This can be explained by the inward shift of the production curve.  In this context it needs to be stated that the  population growth in  Australia  is minimal this has been evident from the demographic study that has been conducted on the country. On the other hand , it has been evident that the country has achieved massive technological progress after a slump in the middle period.  It has also been evident that the atmosphere for research and development has resulted in innovation.  therefore it has been evident in case of Australia  that the technological progress and the innovation has been able to offset the minimal population growth that has been evident in the country (Jones, 1995). 

 The diagram below  represents the phenomenon for Australia.  

The solow growth model Australia



Figure 3: The Solow Growth Model and Australia 

(Source: Authors Creation)


The above diagram explains the phenomenon in the Australian economy that has been evident in terms of the economic growth.  The black line in the above diagrams represents the steady state of the country in the initial stages. It needs to be stated that the initial steady state in the country has been represented by K*’ and the associated level in the per capita income of  the country represented in the  vertical axis.  Here in this regards it needs  to be stated that savings rate in the country has helped in making the investment in order to carry on the production. The technological advancement has reduced the capital dissipation in the country. This has helped in increasing the income of the people and has also  increased the  level of income  for the country  represented by the  intersection of the blue depreciation line and the black invest line. This has reflected increase in the availability of capital per capita and also an equivalent rise in the levels of income for the country.  Therefore, it can be stated this has resulted in the increase in the income levels for the people. This would help in increasing the savings for the people or it can be stated that this increases the savings propensity of the country.  Moreover in this regards it needs to be stated that this increased savings rate would result in changing the slope of the investment line represented in blue sf(k).  

Therefore, it would provide a even higher steady state for the country to reach represented by the blue depreciation line and the investment line represented by K*. the shift in the line of depreciation would also result in a change in the golden rule of capital where the capital accumulation would be maximum. It has been evident from here that this would result in increasing the levels of income of the people of Australia further. This has been apparent from the K** and the associated income levels.  Here it has been evident reaching the new steady state would also increase  the level of capital per capita and also the income per capita. It can be stated that if the country continues to carry on the activity in a similar manner and the phenomenon is not hampered by external cause it can be stated that the country would reach a even higher level of equilibrium. It has been evident in case of  Australia  that it would help in resulting in a higher production function in the country.  This has been evident from the investigation on the country.  It has been evident that the above phenomenon would result in a higher level of consumption.  The rate of investment would also be altered and would reach a higher level, which has been evident from the above investigation and the research.  Here in this regards it needs to be stated that if the savings rate remains unaltered the savings would also increase (Blanchard, 2011). 

It has been evident from the investigation that if the country has reached the steady state in order to maximize the favor of growth the country can alter rates of saving for the country this would also help in increasing the equilibrium for the country at an even higher path (Mankiw, 2014).  In this section reiteration of the savings investment identity needs to be further stated. This would help in understanding the phenomenon in a better manner.  The increasing the savings would result in increased investment. Therefore, it would essential for the developed countries to reduce the rate of savings for the country (Blanchard, 2011).  

Conclusion 

In concluding the project it needs to be stated that the increase in the technological progress in Australia along with the onset of innovation has helped the country  in reaching a higher steady state and  golden rule level of capital. This would effectively contribute to the growth of the country. Over 2.1% growth that has been reflected in the analysis has been evident because of this factor for the country. it canalso be stated this  is a rare phenomenon where developed nations have experienced a more than 2% growth of GDP annually.  In comparing the same with the Japan it has been evident that the Australian growth rates has been almost double that of Japan. Here it needs to be stated that the other parameters like the savings rate and the per capita GDP for the country has more or less have been similar.

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