What are the key ideas of the Solow growth model with respect to capital and technology?

• A. Capital accumulation yields unlimited growth; technology is the only driver
• B. Capital accumulation raises output but with diminishing returns; in the long run, sustained growth requires technological progress; steady-state capital depends on saving and depreciation
• C. Technology alone drives long-run growth
• D. Population growth is irrelevant

Answer: (B)

In the Solow growth model, capital accumulation raises output but with diminishing returns. This means adding more capital increases output, but each additional unit of capital yields a smaller boost than the last. Because of that, the economy moves toward a steady state where investment just replaces depreciation, so output per worker stops rising in the absence of other changes. For sustained increases in living standards over time, you need technological progress that raises the productivity of both capital and labor, effectively shifting the production function upward and allowing per‑capita output to keep growing even though the capital stock per worker remains at its steady-state level.

The steady-state level of capital depends on saving and depreciation: a higher saving rate leads to more investment, pushing the steady-state capital stock and output higher, while higher depreciation lowers them. Population growth also matters in the dynamic story, since it affects how much capital is needed to equip new workers, but the key point is that without ongoing technological progress, growth in per-capita terms cannot be sustained.