Economic growth and economic development 80

Introduction to Modern Economic Growth k(t+1) 45° k* k(0) k* k’(0) k(t) Figure 2.7 Transitional dynamics in the basic Solow model comparative statics Yet, so far, it has no growth The steady state is the point at which there is no growth in the capital-labor ratio, no more capital deepening and no growth in output per capita Consequently, the basic Solow model (without technological progress) can only generate economic growth along the transition path when the economy starts with k (0) < k ∗ This growth is not sustained, however: it slows down over time and eventually comes to an end We will see in Section 2.6 that the Solow model can incorporate economic growth by allowing exogenous technological change Before doing this, it is useful to look at the relationship between the discrete-time and continuous-time formulations 2.4 The Solow Model in Continuous Time 2.4.1 From Difference to Differential Equations Recall that the time periods could refer to days, weeks, months or years In some sense, the time unit is not important This suggests that perhaps it may be more convenient to look at 66