The Solow Model
We’re now going to get into the theory of how growth works. We want to explain why economies appear to follow a balanced growth path (BGP), what determines the growth rate along those BGP’s, why countries appear to return to BGP’s if they are not on them to begin with, and why some BGP’s involve GDP per capita at a higher level than others.
That is going to require us to understand how GDP is produced (the production function) and how capital is accumulated. Putting production and capital accumulation together is going to allow us to be able to answer those questions.