Office Hours: The Solow Model: Investments vs. Ideas

Ideas are a major factor in economic growth. But so are saving and investing. If you were given the choice between living in an inventive (more ideas) or a thrifty (more savings) country, which would you choose?
The Solow model of economic growth, which we recently covered in Principles of Macroeconomics, can help you make the choice. In this Office Hours video, Mary Clare Peate will use our simplified version of the Solow model to show you an easy way to work out each country’s economic prospects, and then compare them to see where you’d rather be.
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[@subhasreebasak5067]

Is there any video on Romer's Model? Can you please help me understand that concept.. It ll be really helpful. Thank you

[@amjose13]

supermodel super videos by MR University. Thank you

[@ezekielwamalwa5900]

Very informative, definitely going for Inventive. Question, what if your investment is in innovation or technology would you prefer the Thrifty?

[@darnell8897]

I'm only 3 videos into understanding Solow, but I'm confused by the concept of "A" (ideas) in general. While ideas are a multiplier of both Labor (eL) and infrastructure (K), how is this instantiated in the real world? Does this assume things like intellectual property laws to enforce a temporary monopoly on new ideas, or do the new ideas only matter when means of production are re-tooled to implement them? If the later, what differentiates them from K?

[@Pilgrim1st]

Doesn't assume intellectual property laws to stand as a concept, although one may argue for or against intellectual property laws effect on the multiplier. Some would argue that because they crease incentives they would allow for a larger multiplier of "A" and some would argue that by restricting the use and flow of ideas they'd contract it. The concept of ideas in this equation would work this way: a labourer with all the components to produce a tractor but no knowledge of how to do so might produce something else with the components that were less useful for further economic growth, or if they knew how to make something better, even more. The knowhow to take components and put together to form something. or invent something new, is the concept at play here. Without any ideas, there would be no capital made, but more ideas would result in each unit of capital being more productive, hence the multiplier. I'm aware this is an old comment but thought I'd leave this reply for those stumbling on the video.

[@mourgelas4510]

I'm new here, so maybe I've missed something, but I would expect an inventive country to invest more than a thrifty one. Ideas are good, but you need to put them into practice, i.e. invest, right?

[@MRCKify]

Investment=Savings, so Inventive still invests ( and in this example, invests the same amount as Thrifty). Inventive uses its relatively low savings to fuel twice the production. If you just called the countries "A" & "B" and used the same descriptions of their production and investment behaviors, you'd get the same answers.

[@alokebachhar7419]

Mam,I really like your teaching style.

[@johnkelly6550]

The teacher appears arrogant in that, she feels she is better than others, "come back and we (meaning "I") will how you how to do it." And Ignorant in that, she believes what she is teaching, even though it requires numerous qualifiers and does not work all the time on everything.

[@PrinceKumar-hh6yn]

@@johnkelly6550 I don't feel so. Even not after reading ur Experience. Could u Elaborate your experience; what made u feel so

[@soulreaperichig0]

@@johnkelly6550 Projecting much?

[@t.sathwik5708]

👍

[@PrinceKumar-hh6yn]

Inventive citizens get to consume more not only today but tomorrow, making it more attractive country to live in 🕊️⛄🌁

[@murrayvonmises]

Seems odd to base a conclusion on what an economy "should have" on artificial numbers. Easy question nonetheless.

[@RonVillejoConsulting]

Perhaps not all people will choose Inventive, purely on the basis of its having more output to consume; some will choose Thrifty by the very nature of its thriftiness. In reality, also, many people don't get to choose which country to live in; they're born into, and effectively bound up in, the very country where they are.

[@MrAdmin66]

The model is completely biased as is based on the assumption the "inventive" produce more. Then, it is obvious they can consume more (all the rest being equal). But the initial assumption, the GDP function is questionable.

[@marcosfuerte8739]

Agreed, this does not keep into account the # of population growth, black markets, and inflation/deflation.

[@sirturnables]

@@marcosfuerte8739 Why are there always people like you guys, huh?? Other factors are held constant just demonstrate how ideas affect GDP; and you are here making conspiracy theories?? Get outta here already!!

[@marcosfuerte8739]

@@sirturnables Economics became economics through theories. Standard economic theory is still being questioned even to this day, for example how can free market capitalism help minimize the opportunity cost of environmental impacts?

[@sirturnables]

@@marcosfuerte8739 Whatever man! Am here to learn standard economic theory. We will discuss the rest later! I do not pretend to be an expert without fully grasping the basics. So please, if you are an expert, leave us beginners to learn the basics and stop drawing attention to yourself!

[@marcosfuerte8739]

@@sirturnables 😄

[@lherbolich98]

m or f ?