Economic Growth and Economic Fluctuations Essay

Economic Growth and Economic Fluctuations - Essay Example The economic theories and models examined would be the Solow Model, the human capital theory and screening model. The effects of governmental policies on the openness of the economy will also be examined here. The data given will serve as guiding force in the determination of the ability of our study country to achieve rapid short-term economic growth and long-term sustenance of a steady rate of growth. When charged with the responsibility of determining the best policy to foster long-term economic growth, it is vital to analyze many economic factors and trends. These factors include the impact of productivity, savings and depreciation on the economy as well as the economy's ability to sustain long-term growth under the given circumstances. In so doing, the Solow Model can serve as a general guidance in determining whether an economy can sustain long-term growth given the present combination of factors. In order to examine this it is vital to offer an operational definition of Solow's model. Solow's model is a model the increase in the capacity of a country's economy to produce goods and services over time. This increase theoretically implies that the well-being of the citizens will improve over time. According to Solow the increase can be determined utilizing a formula whereby the GDP is determined by combinations of inputs. Solow simplifies this very intricate function by presumi ng certain factors are held constant. One of the most fundamental simplifications is the assumption that a single good is produced by the economy in question. In so doing, the GDP is greatly simplified and its implications are clearly depicted. The other assumptions of the Solow model include the assumption that all data is collected on a time continuum, a single good is produced with a constant technology, there is no governmental or international trade, all factors of production are utilized to their full capacity, the growth within the labor force is constant. Utilizing the relationship existent between the savings and the investment and extending the Solow model further, we can assume that the depreciation rate, the amount of capital depreciation and the change in capital over time are held constant. The implications of this are such that in the long-run, we are able to yield a production function whereby Y = AF(K, L). Essentially, it establishes a relationship between capital stock and the economic output. Taking this one step further and assuming that labor input is held constant and there is a positive correlation between changes in capital and output we can see that in time additions to capital stock will yield additions in output. This relationship can be expressed in terms of labor and economic output. In so doing, we can determine the economic output for each individual in the society. The pertinent equation is y=Y/L and can be graphically depicted as follows: The Impact of Savings Rate on Long-term Economic Growth After having examined the production function, we need to examine a prudent question-Is it possible for our country of study to catch up with richer countries and at what rate will it occur In examining that question, we need to realize that according