Explain How the Solow Growth Model Would Analyse the Effects of a Fall in the Household Saving Ratio

In this essay, I will focus on two important aspects. The first is to give a brief historical outline of the Solow growth model. The second thread runs express how the outline on the Solow growth model might explain the effect of a fall in the household savings ratio. My essay will be guided by the diagram provided on which I have to make specific references and to think through as well as explain the various steps of the Solow growth model and what this would mean for economic growth. Without dismissing earlier attempts, the foundations upon which modern economic growth theory rests on the foundations put by US economist Robert Solow (1924-) in the 1950s and 1960s. The Solow growth model is very neoclassic in that it focuses primarily on the supply side. The Solow model seems to implicitly assume that, as long as the supply of goods increases, economic growth can be attained. In this way it is apparently different from Keynesian models of which focus is on the demand side of the economy such as inflation and unemployment. One of the major central reason by Solow to come up with the Solow model came from the desire to know what happens in the long run to an economy in which capital accumulation is taking place. In pursuit of an answer to this question Solow came up with a degree of mathematical and analytical work. Solow pursued a model of an economy in which one has a single good that can be consumed or invested, and he says the total output in the economy Y to the total labour supply L and the stock of physical capital K. When Solow talked of physical capital he meant things like machinery, buildings, equipment, things used by labour to make products. The aggregate measurement of output is symbolised by (Y), labour (L) and capital (K). This means that Y,L and K are variables describing the whole economy. The Solow growth model tells us that in the long term, the development of a closed economy will remain at a steady state, where there is no more growth. In figure 2, the economy has settled down in point E. Here, the fraction of an average worker output that is being saved, equals the average required investment to account for the depreciation and decay. This being achieved with k1 amount of capital per worker, the economy produces an output of y1 per worker, the economy produces an output of y1 per worker. A sudden fall in the household saving ratio to s*< s leads to negative net investments F minus E: workers only save a fraction s* of still the same y1, and therefore there is not enough being saved in the economy to be able to finance the decay of the capital stock at k1. As the level k1 cannot be retained by the average worker which is (negative net investments), the output per worker y has to start to decrease. In a dynamic process, the economy will move along the curve y=f(k), that means the amount of output per worker y will decrease, until it settles at a new steady state, where the net invstements equal zero. This being achieved at point E*, the resulting capital intensity is k*, with which an output of y* can be produced with y* being smaller than y1. In other words, a fall in the household ratio leads to a decrease of the amount of capital stock, a closed economy is able to to retain in the long term. The decay in the existing capital stock cannot anymore be completely replaced by investments, as there is not enough money being saved in the economy due to the fall in the household saving ratio. These resulting negative net investments will force the economy to decrease its output to the level y*. Only here, the amount being saved in the economy can again replace the complete decaying capital stock, which means the economy settles at a new long term equilibrium, a new steady state. The fall in the household saving ratio has therefore reduced the productivity of the average worker in the economy. PART B How far do models of corporation and bargaining alter our understanding of the potential for corporation between states. In this essay, I will focus myself on two models of cooperation and bargaining. The first model is called realism and its thrust is to say that the international political systems as a whole is anarchic in so far as there is no world government but what exists are multiple competing sovereigns. In terms of cooperation and bargaining between states realism poses real challenges to interdependence and specialisation. The second model is called liberalism and like realism it begins by acknowledging that the system is of course anarchic but it goes a bit further to argue that the interests that states seek to pursue in conditions of anarchy are shaped very much by the nature of the society, domestic, and transnational over which they seek to rule and particularly liberals stress the role of dominant powerful groups within society in shaping the nature of the national interests and this is clearly illustrated in a story about the development of India`s national interest in chapter 6. The fundamental difference between the two models is that liberalism says it is not just anarchy plus the distribution of power, it`s anarchy, and the distribution of power plus interdependence. The prospects for cooperation between states under conditions of both anarchy and interdependence bring to fore three aspects of the game. The first, the game is positive-sum when states are concerned purely with their absolute gains but the chance for bargaining and cooperation to mutual advantage are real and if the positive-sum is changed negatively it results in zero-sum games in which neither will be prepared to move from the original position hence blocking cooperation. The third is when states care about both their absolute gains and their relative positions giving us an indeterminate outcome and it very much depends on how the nations weigh the one against the other. In answering the question topic therefore, I am diving into a web of complexity. The realists`philosophical thrust claims that in an anarchic system, what then differentiates states are rather their capabilities as compared to their functions. In short it is the power of states, not their common purposes (survival), that differentiates one international political system from another (Bromley, 2004 p113) In the Realist mode therefore, the state will seek to avoid as necessary as possible forms of interdependence that create vulnerability in relation to issues of security, so they will avoid all forms of subordination with relation to other states in terms of power, since the superior power of some may also threaten the security of the weak. An example in our world today could be United States with the killing of Osama Bin Laden, where the US Navy SEALS are accused of transgression and trespassing into Pakistan without sovereign rights. In just some few words one could say that the international political systems between and among states according to realists comprise an anarchy of similar, competing political authorities in which each strives to maintain or improve its relative power base. Mexico epitomises this concept in the 1910 revolution and the subsequent creation of the PRI in 1929 which fostered a strong nationalistic ideology geared toward maintaining the independence of the country from foreign economic and political influences. Having outlined in short the essence of realist philosophy, there is need therefore, to ask what implications does this realist thinking have on cooperation and bargaining between states? The realist thinking has very essential implications in the fact that cooperation between states have to be severely limited even with big organisations like WTO because what should be avoided at all costs are dependencies. Even if there are benefits that accrue from cooperation with another state, you simply cannot depend on another country since this can create vulnerabilities lets say in cases of diplomatic fallout or cases of war. Another recent example is the treacherous diplomatic fallout between United Kingdom and Malawi with consequences on bilateral relations and especially the impact it will have on a largely dependent country Malawi. That limits considerably the scope for cooperation. According to Huysmans the other element that restrict cooperation between states, or even regional blocks in this case, sometimes like the European Union, â€Å"they are not calculating primarily their benefits from cooperation in terms of what they would gain in comparison to their major competitors, because what matters is not how much richer I become as a state, what matters is how much richer I become as a state compared to you, because then I`m more powerful, can translate to military power, economic power and so on† (Huysmans, Audio CD, 2010) In short state actors have to guarantee their own self-preservation, that is to say individuals in a state of nature or states in an anarchic international system will not willingly cooperate if the result is an increase in vulnerabilities and/ or decrease in relative power. Paul Hirst, a sociologist and political theorist served a blow to to realists`arguments by going against the view that sovereign control of territory is forged purely internally by arguing that states need to interact in the anarchic realm of international politics with other states. The achievement of sovereignty therefore, is at least partly the product of agreements between states in the form of recognition of each others`sovereign rights (Bromley 2004, p120) In this case therefore one dependents on the other. This then is the best chance to bring into play liberalism which argues that what we need to look at is the way in which the different national interests of states, that are shaped by the societies over which they rule, are configured together when put together at an international system. What we have are states all interacting with one another, all chasing national interests, as defined by their dominant groups, and those interests configure in different ways sometimes states interests are conflictual, sometimes cooperative and at some points mutually beneficial. Trade liberalisation is an example where arguably, the interests of states that are mutually engaging in trade liberalisation are not in conflict. They can both benefit from trade. States may come to view their position in relation to the others in a much more absolute terms and as a consequence of that, with full understanding of the fact that the structure of international system is interdependent as well as anarchic, enduring cooperation is at least a possibility. The states according to Bromley face an environment of what is called â€Å"strategic inter-dependence† to mean the strategies that one can champion are conditioned by their anticipation of the strategies that others will pursue (Bromley CD 2010). Unlike, the realists, the assumption is that when states`interests interact internationally, it is not always the case that states will focus on their position or be worried about dependence, and the argument pursued is that security is only one value among others, that security will be balanced alongside other considerations like economic welfare, promotion of cultural values, or whatever. In this regard Mexico is a perfect example, in so far as Mexico joined NAFTA, not worrying so much about its position vis-a-vis its dominant neighbour, the United States but increasingly focusing on the absolute gains that Mexico might make through those policies. Chapter 9, says states sometimes interact in positive-sum ways, meaning when they interact they both gain from cooperation and bargaining, sometimes they interact in ways that are zero-sum; if I gain you lose or otherwise it is negative-sum in which both sides lose. The realists model that Jef outlines seems to advocate or assume that all cooperation because they are relative ains, are zero-sum; if I gain you lose but according to liberal thinking there are situations when it is a win-win situation (Bromley CD 2010) The Liberal model also argues that there are many situations where mutual dependence does not imply vulnerability vis-a-vis security or even worry about their relative position vis-a-vis other states and an example could be that as a country, we can come to define our national interest in terms, not of how we are progressing vis-a-vis another country but how we are coping vis-a-vis last year, focused only on our growth rate. The core claim of liberal model is that once you recognise the strategic nature of interdependence and once you recognise that the national interest is socially shaped by society and not just deriving from your position in the state system, then the possibilities of cooperation are far much greater. Concluding remarks draws three general conclusions, the game is positive-sum if states are geared solely with their absolute gains, there is chance for co-operative bargaining to mutual advantage. Anarchy is no danger to cooperation in this world. Secondly, if states evaluate their positions purely in relation to others, then all games even positive-sum ones are turned to zero-sum ones where neither will be prepared to move away from the original thereby blocking cooperation as was seen between the superpowers during the Cold War. Thirdly, when states care about their absolute gains and their relative positions, the outcome is indeterminate and depends on how they weigh the one against the other. If relative considerations do not weigh too heavily in their calculations, states may still find themselves in a positive-sum game.