Wednesday, September 1, 2010

Solow Residual

FLG was thinking about the Solow Residual yesterday on his drive home from work. For those of you who aren't familiar with it, this is the basic idea -- Long run economic growth depends on two things and two things only, labor force growth and technological innovation.

The amount of capital, labor, etc in an economy is relatively easy to measure. Or at least easier to measure than technological progress. So, economists plug in numbers for the things they know, then what's left over, the residual, they assume is due to technological growth.

What FLG always takes away from this economic model is this:
The key thing is the increase in the level of technology in a country. Developing countries can simply improve their technology by buying existing products. Developed nations, like the United States which already pretty saturated with the newest technology, have to wait for new technology to be invented.

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