The Solow Model in the Empirics of Growth and Trade

Abstract

Translated to a cross-country context, the Solow model (Solow, ) predicts that international differences in steady-state output per person are due to international differences in technology for a constant capital output ratio. However, most of the empirical growth literature that refers to the Solow model has employed a specification where steady-state differences in output per person are due to international differences in the capital output ratio for a constant level of technology. My empirical results show that the former specification can summarize the data quite well by using a measure of institutional technology and treating the capital output ratio as part of the regression constant. This reinterpretation of the cross-country Solow model provides an implication for empirical studies of international trade. Harrod-neutral technology differences, as presumed by the Solow model, can explain why countries have different factor intensities and may end up in different cones of specialization.

Keywords: Solow model, Lerner diagram

JEL Classification: O40, F11