CHAPTER 6

Economic Growth: Malthus and Solow

CHAPTER KEY IDEAS
1. There are eight primary facts of economic growth that economists have tried to
explain.
2. In the Malthusian model of economic growth, population growth increases with the
standard of living. The model predicts that an increase in total factor productivity
merely increases the population. It has no effect on the standard of living in the long
run.
3. The Malthusian model does a good job of explaining economic growth prior to the
Industrial Revolution of the nineteenth century, but it cannot explain the growth
experience after 1800.
4. Unlike the Malthusian model, capital accumulation plays an important role in the
Solow growth model.
5. The Solow growth model predicts that long-run improvements in the standard of
living are generated by technological progress, that countries with high (low) savings
rates tend to have high (low) levels of per capita income, and that countries with high
(low) population growth rates tend to have low (high) levels of per capita income.
6. The Solow growth model is much more optimistic than the Malthusian model about
the prospects for improvements in the standard of living.
7. Growth accounting is an approach to decomposing economic growth to factor input
growth and total factor productivity growth.

NEW IN THE THIRD EDITION

1. New: Macroeconomics in Action 6.1: Resource Misallocation and Total Factor
Productivity .
2. All data and graphs have been updated.

TEACHING GOALS
Students easily take for granted the much more abundant standard of living of today as
opposed to twenty, fifty, or one hundred years ago. Sometimes it is easier to remind

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Chapter 6: Economic Growth: Malthus and Solow

students of what their ancestors had to do without, rather than simply referring to per
capita income levels over time. Recessions come and go, and yet economic growth
swamps the lost output we endure during hard times. The most recent recession is unlike
the Great Depression, in that the drop in GDP below trend is not as large and is not as
prolonged, and our times are certainly not at all like the Great Depression in that our
incomes are many times larger than those of the typical person in Canada in the 1930s.
The typical student begins the study of economic growth against the backdrop of the
recent growth experience of Canada. The current standard of living in Canada vastly
surpasses the current standard of living in most countries and would have been
unimaginable anywhere in the world before the advent of the Industrial Revolution. Until
about 1800, the world economy produced little more than a subsistence level of income
for any but the richest individuals. Growth in per capita income was nonexistent. The
Malthusian model of growth explains the tendency of increases in population to dilute
any gains in productivity.
The Industrial Revolution introduced the possibility of sustained growth in per capita
income through the accumulation of physical capital. However, growth experience has
varied widely around the world. The richer countries have a sustained record of growth.
Since 1870, per capita income in Canada has been growing at an average rate of about
two percent per year. While two percent growth may seem small, it is important for
students to realize that such growth transforms into a more than doubling of per capita
GDP per generation. Unfortunately, the poorer countries have remained poor.
Furthermore, their growth rates have not generally matched growth rates in the richer
countries, so that the poor countries fall farther and farther behind. Such differences in
standards of living and growth prospects present puzzles that the study of economic
growth hopes to solve.

CLASSROOM DISCUSSION TOPICS

Getting students to relate to differences in standards of living can sometimes be difficult.
It is easy to take ones own standard of living for granted. An interesting discussion topic
is whether students would be willing to travel back in time to 100 or 200 years ago, if
they could be one of the richest people of those earlier times. Would the trade-off be
worthwhile? While students typically stress factors like antiquated views about freedom
of choice and racial and gender issues, try to encourage students to direct their concerns
to those that are more economic than social. Also point out that higher standards of living
allow societies to be more concerned about issues of equality when mere survival is no
longer precarious.
Students often view population growth as the result of cultural factors and personal
preferences. Against the abundance of daily living, it is easy to forget economic factors.
Ask the students for examples of economic factors that might influence fertility decisions.
The Malthusian model suggests that growth may only be achieved through population
control. In the modern economy, the costs of raising children can be formidable, and so
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Instructors Manual for Macroeconomics, Third Canadian Edition

there is a tendency for such costs to be a disincentive to fertility. Such costs may
contribute to the tendency for low fertility rates in advanced economies. In less developed
societies, having a large family can be a private form of social security. The more
children a family has, the more children there will be to provide for the parents in old age.
Poor public health conditions may actually enhance fertility. If each child has a smaller
chance for survival to adulthood, more births are required to produce a given-sized
family.
A major goal of most countries is to have sustained growth in per capita real GDP. Ask
students whether this is an appropriate goal for all countries in all periods. Is growth
always beneficial? What problems can growth bring?
Although growth normally leads to more jobs and a greater availability of goods and
services, growth can bring difficulties as well as gains. Rapid growth can cause
congestion and unhealthy living and working situations. The need for raw materials may
despoil pristine natural settings. In the lower mainland of British Columbia, the pressure
of economic and population growth has seriously reduced air quality and damaged
natural habitats for wildlife. Industrial production may pollute the air, water, and land. At
some point one must wonder if the price we pay for more goods and services is worth
what we give up in beauty and cleanliness.
Does growth benefit everyone? There is an implicit assumption that when the total
amount of goods and services available goes up, everyone will receive more. However,
sometimes the benefits of growth are very unequally distributed. Workers and business
owners may do better, but frequently the unemployed, the retired, and marginal workers
receive few benefits. Sometimes one region may gain while others stagnate, causing
regional conflict.

OUTLINE
1. Economic Growth Facts
a) Pre-1800: Constant per Capita Income across Time and Space
b) Post-1800: Sustained Growth in the Rich Countries
c) High Investment High Standard of Living
d) High Population Growth Low Standard of Living
e) Divergence of per Capita Incomes: 18001950
f) No Conditional Convergence amongst all Countries
g) Conditional Convergence amongst the Rich Countries
h) No Conditional Convergence amongst the Poorest Countries
2. The Malthusian Model
a) Production Determined by Labour and Fixed Land Supply
b) Population Growth and per Capita Consumption
c) Steady-State Consumption and Population
i) Effects of Technological Change
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Chapter 6: Economic Growth: Malthus and Solow

ii) Effects of Population Control
d) Malthus: Theory and Evidence
3. Solows Model of Exogenous Growth
a) The Representative Consumer
b) The Representative Firm
c) Competitive Equilibrium
d) Steady-State Growth
i) The Steady-State Path
ii) Adjustment Towards Equilibrium
e) Savings and Growth
i) Equilibrium Effects
ii) The Golden Rule: MPK n d
f) Labour Force Growth and Output per Worker
g) The Solow Growth Model, Investment Rates, and Population Growth (Theory
Confronts the Data 6.1)
h) Total Factor Productivity and Output per Worker
4. Growth Accounting
a) Solow Residuals
b) The Productivity Slowdown
i) Measurement of Services
ii) The Relative Price of Energy
iii) Costs of Adopting New Technology
c) Cyclical Properties of Solow Residuals
d) Growth Accounting Exercise
e) East Asian Miracles and Total Factor Productivity Growth (Macroeconomics in
Action 6.1)

TEXTBOOK QUESTION SOLUTIONS

Problems
1. The amount of land increases and, at first, the size of the population is unchanged.
Therefore, consumption per worker increases. However, the increase in consumption
per worker increases the population growth rate. In the steady state, neither c* nor l*
are affected by the initial increase in land. This fact can be discerned by noting that
there will be no changes in either of the panels of Figure 6.8 in the textbook. (This
figure is also reproduced as Figure 6.1, below.)

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Instructors Manual for Macroeconomics, Third Canadian Edition

Figure 6.1
2. A reduction in the death rate increases the number of survivors from the current
period who will still be living in the future. Therefore, such a technological change in
public health shifts the function g(c) upward. In Problem 1 there were no effects on
the levels of land per worker and consumption per worker. In this case, the g(c)
function in the bottom panel of Figure 6.2 shifts upward. Equilibrium consumption
per worker decreases. From the top panel of Figure 6.2, we also see that the decrease
in consumption per worker requires a reduction in the equilibrium level of land per
worker. The size of the population has increased, but the amount of available land is
unchanged.

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Chapter 6: Economic Growth: Malthus and Solow

l : Land per worker

Figure 6.2
3. For the marginal product of capital to increase at every level of capital, the shift in the
production function is equivalent to an increase in total factor productivity.
a) The original and new production functions are shown in Figure 6.3 below.

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Instructors Manual for Macroeconomics, Third Canadian Edition

Figure 6.3
b) Equilibrium in the Solow model is at the intersection of szf (k ) with the line
segment (n d )k . The old and new equilibria are depicted in the bottom panel of
Figure 6.3. The new equilibrium is at a higher level of capital per worker and a
higher level of output per worker.
c) For a given savings rate, more effective capital implies more savings, and in the
steady state there is more capital and more output. However, if the increase in the
marginal product of capital were local, in the neighborhood of the original
equilibrium, there would be no equilibrium effects. A twisting of the production
function around its initial point does not alter the intersection point.
4. An increase in the depreciation rate acts in much the same way as an increase in the
population growth rate. More of current savings is required just to keep the amount of
capital per worker constant. In equilibrium, output per worker and capital per worker
decrease.

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Chapter 6: Economic Growth: Malthus and Solow

5. A destruction of capital.
a) The long-run equilibrium is not changed by an alteration of the initial conditions.
If the economy started in a steady state, the economy will return to the same
steady state. If the economy were initially below the steady state, the approach to
the steady state will be delayed by the loss of capital.
b) Initially, the growth rate of the capital stock will exceed the growth rate of the
labour force. The faster growth rate in capital continues until the steady state is
reached.
c) The rapid growth rates are consistent with the Solow models predictions about
the likely adjustment to a loss of capital.
6. A reduction in total factor productivity reduces the marginal product of capital. The
Golden Rule level of capital per worker equates the marginal product of capital with
n d . Therefore, for given n d , the Golden Rule amount of capital per worker must
decrease as in Figure 6.4, below. Therefore the Golden Rule savings rate must
decrease.

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Instructors Manual for Macroeconomics, Third Canadian Edition

Figure 6.4
7. a) Given the production function, we can write the per-worker production function
as
zf (k ) zk 0.5
Then, from Equation 6.19 the steady state quantity of capital per worker, k, is
determined by
0.2k 0.5 0.11k ,
so solving for k we get k = 3.3058. Then, income per capita is (3.3058)0.5 =
1.8182. Finally, consumption per capita is given by 1.8182(1-s) = 1.4546.
b) 1.4545 1.1939 1.2964
1.9939 2.0905

1.3982

Period k

3.96

1.99 1.19

4.67

2.16 1.30

5.43

2.33 1.40

6.25

2.50 1.50

7.11

2.67 1.60

8.02

2.83 1.70

8.98

3.00 1.80

9.99

3.16 1.90

11.04 3.32 1.99

10

12.14 3.48 2.09

1.4994

1.5998

1.6995

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1.7985

1.8966

Chapter 6: Economic Growth: Malthus and Solow

In the new steady state, with s = 0.4, calculating the steady state as before, we get
k = 13.22, y = 3.64, and c = 2.18. Note that after 10 periods, the economy is much
closer to the new steady state than to the old steady state with the lower savings
rate. Of particular interest is the fact that consumption per capita actually
decreases initially relative to the initial steady state, but consumption per person
will actually be higher in the new steady state than in the initial one. This effect
occurs because, with a higher saving rate, consumption must initially fall, but as
the capital stock rises, the higher level of output tends to increase consumption.
8. Government spending in the Solow model.
a) By assumption, we know that T = G, and so we may write:
K ' s(Y G) (1 d )K sY gN (1 d )K

Now divide by N and rearrange as:

k '(1 n) szf (k ) sg (1 d )k

Divide by (1 n) to obtain:
k'

szf (k )
sg
(1 d )k

(1 n) (1 n) (1 n)

Setting k = k we find that:

szf (k * ) sg (n d )k * .

This equilibrium condition is depicted in Figure 6.5.

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Instructors Manual for Macroeconomics, Third Canadian Edition

Figure 6.5

b) The two steady states are also depicted in Figure 6.5.

c) The effects of an increase in g are depicted in the bottom panel of Figure 6.5.
Capital per worker declines in the steady state. Steady-state growth rates of
aggregate output, aggregate consumption, and investment are all unchanged. The
reduction in capital per worker is accomplished through a temporary reduction in
the growth rate of capital.
9. The Golden Rule quantity of capital per worker k * is such that MPK zf (k * ) n d . A
decrease in the population growth rate, n, requires a decrease in the marginal product
of capital. Therefore, the Golden Rule quantity of capital per worker must increase.
The Golden Rule savings rate may either increase or decrease.
10. a) Capital evolves over time, as in Equation 6.16, according to
K ' szF ( K , bN ) (1 d ) K .
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Chapter 6: Economic Growth: Malthus and Solow

Now, simplifying, as for Equation 6.17, we get
k ' (1 n)(1 f ) szf (k ) (1 d )k ,
where k is now the quantity of capital per efficiency unit of labour, and f(k) is the
production function in per-efficiency-unit-of-labour form. The quantity of capital
per efficiency unit evolves in a picture just like Figure 6.13 in the text, with a
unique steady state where the quantity of capital per efficiency unit of labour is a
constant. Therefore, in the steady state, all aggregate variables will grow at the
rate n + f +nf, or (approximately, if nf is small) the rate of population growth plus
the rate of growth of human capital. Per-capita income grows at the rate f.
b) An increase in f works just like an increase in n in Figure 6.19. In the new steady
state, the quantity of capital per efficiency unit of labour will be lower. However,
per capita income will be growing at a higher rate in the new steady state, as f has
increased.
11. Production linear in capital:
Y
K
z zf (k ) f (k ) k .
N
N

a) Recall Equation 6.18 from the textbook, and replace f (k ) with k to obtain:
(sz (1 d )
k.
(1 n)
Y
1Y
1 Y'
and k '
. Therefore:
Also recall that zk k
N
zN
z N'
k'

Y ' (sz (1 d )) Y
.

(1 n) N
N'

So long as

sz (n d )
1 , per capita income grows indefinitely.
(1 n)

b) The growth rate of income per capita is therefore:

Y' Y

(sz (1 d ))
g N' N
1
Y
(1 n)
N
sz (n d )

(1 n)

Obviously, g is increasing in s.
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Instructors Manual for Macroeconomics, Third Canadian Edition

c) This model allows for the possibility of an ever-increasing amount of capital per
worker. In the Solow model, the fact that the marginal product of capital is
declining in capital is the key impediment to continual increases in the amount of
capital per worker.
12. Solow residual calculations.
a)
Year Y
K

1997 951.962

1901.205

13.706

15.81515

1998 990.968

1939.456

14.0462

16.08661

1999 1045.786 1982.253

14.4067

16.56914

2000 1100.515 2026.245

14.7642

17.02713

2001 1120.146 2070.784

14.9462

17.07114

2002 1152.905 2114.205

15.3104

17.16955

2003 1174.592 2168.088

15.6723

17.07934

2004 1211.239 2234.278

15.947

17.24302

2005 1246.064 2313.561

16.1697

17.3846

2006 1284.819 2400.494

16.4843

17.49051

2007 1319.681 2491.746

16.8664

17.48244

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Chapter 6: Economic Growth: Malthus and Solow

b) Percentage Growth Rates

Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
1997

4.097432
5.531763
5.233289
1.783801
2.924529
1.881074
3.119977
2.875155
3.110193
2.713378
4.097432

2.011935
2.20665
2.219293
2.198105
2.096839
2.548618
3.05292
3.548484
3.757541
3.801384
2.011935

2.482125
2.56653
2.481484
1.232712
2.43674
2.363753
1.752774
1.396501
1.945614
2.317963
2.482125

1.716413
2.999587
2.764117
0.2585
0.576421
0.52539
0.958371
0.82107
0.609205
0.0461
1.716413

From year to year, note that growth in the capital stock is least variable, growth in
the labour input is somewhat more variable than growth in the capital stock, and
growth in TFP is most variable. Thus, TFP appears to contribute most to
variability in the growth in aggregate output from year to year. It is
straightforward to sort out year by year what contributes most to output growth.

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