Evaluate the theoretical properties of the 'Solow-Swan Growth Model'. What role does total factor productivity play in the steady-state growth of per capita income?

💡 Solution & Explanation

In the neoclassical Solow-Swan model, diminishing returns to capital imply that capital accumulation eventually ceases to generate growth in per capita output on its own. Therefore, exogenous technological progress or total factor productivity growth becomes the only factor capable of sustaining long-term increases in output per worker in steady state. Alternative choices attribute long-term per capita growth incorrectly to savings or capital accumulation alone. The model remains foundational for growth accounting.