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Copyright © The Author 2007. Published by Oxford University Press.
The Solow model in the empirics of growth and trade
* Kiel Institute for the World Economy, Germany, e-mail: erich.gundlach{at}ifw-kiel.de
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Abstract |
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Translated to a cross-country context, the Solow model (Solow, 1956) predicts that international differences in steady-state output per person are due to international differences in technology for a constant capital–output ratio. However, most of the empirical growth literature that refers to the Solow model has employed a specification where steady-stateifferences in output per person are due to international differences in the capital–output ratio for a constant level of technology. My empirical results show that the former specification can summarize the data quite well by using a measure of institutional technology and treating the capital–output ratio as part of the regression constant. This reinterpretation of the cross-country Solow model provides an implication for empirical studies of international trade. Harrod-neutral technology differences, as presumed by the Solow model, can explain why countries have different factor intensities and may end up in different cones of specialization.
Key Words: Solow model • Lerner diagram
Paper presented at the AEA annual meeting in Boston, 6–8 January 2006. I am grateful for comments by Robert Solow.
1 For detailed references to this literature, see, http://www.bris.ac.uk/Depts/Economics/Growth/refs/augsol.htm, and http://www.bris.ac.uk/Depts/Economics/Growth/refs/levels.htm
2 This dataset is now available as the Penn World Tables at http://pwt.econ.upenn.edu/
3 In Figure 5, wA and wB are fixed at 70 per cent of yA and yB, which approximately equals the size of labour's share in factor income.
4 This section partly draws on Gundlach (2005)
5 MRW augment the Solow textbook model by a third factor of production, namely human capital. Their empirical results are meant to support the augmented Solow model, not the textbook Solow model, but this does not make a difference for the point to be discussed here. As an aside, human capital per output, which equals the conditional share of human capital investment in GDP, should be used as an explanatory variable in the augmented Solow model (as in MRW). Using the level of human capital per worker as an explanatory variable, as in some other empirical studies, cannot be motivated with reference to the Solow model.
6 MRW assume average values of 1 per cent for n and 3 per cent for 
. An alternative parameterization that is sometimes used in the literature assumes a value of 5 per cent for .
7 See Mankiw et al. (1992, Table II, column (1)).
8 See Acemoglu et al. (2001, Table 4, column (1)); their dependent variable is output per capita in 1995.
9 A similar specification has been used by Masters and McMillan (2001), who consider frost frequency as a proxy variable for the potential impact of geography (or agricultural ‘technology’) on development.
10 As before, to simplify the presentation, I omit the human capital variable which is not essential for the point to be discussed.
11 Using a value of 5 per cent for (see footfn 6) and all other things constant, one would predict a rate of convergence of 2.7 per cent.
12 See, for example, Trefler (1995), Davis and Weinstein (2001), Debaere (2003), and Schott (2003).
13 In a time-series context, the steady-state condition is that technology, output per worker, capital per worker, and the wage grow with the same rate.
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