The Solow-Swan model is an economic framework that analyzes the long-run growth of an economy by considering the factors of capital accumulation, technological progress, and labor. It is commonly represented through a diagram known as the Solow-Swan diagram.
In the Solow-Swan diagram, the horizontal axis represents the level of capital per worker (K/L), and the vertical axis represents the level of output per worker (Y/L) or GDP per worker. The diagram typically shows a production function curve, a capital accumulation curve, and a depreciation line.
When considering the impact of an increase in human capital on GDP, both in the long-run and in the transition to the long-run, the diagram can be used to illustrate the effects.
In the long-run: An increase in human capital, such as improvements in education, skills, or training of the workforce, leads to a shift in the production function curve upwards. This shift represents an increase in the productivity of labor. As a result, the economy can produce a higher level of output per worker (Y/L) or GDP per worker. This shift indicates long-term economic growth and an improvement in living standards.
In the transition to the long-run: In the short to medium term, the increase in human capital has a positive effect on output per worker (Y/L) or GDP per worker. However, the capital accumulation curve in the Solow-Swan diagram depicts the diminishing marginal productivity of capital. As the economy approaches its new long-run equilibrium, the impact of human capital on GDP diminishes, and the growth rate of output per worker returns to its steady-state level.
Overall, an increase in human capital positively influences GDP in both the long-run and the transition to the long-run. However, the effect may be more pronounced in the short to medium term as the economy adjusts to the higher productivity of labor. The Solow-Swan diagram provides a visual representation of these dynamics and helps explain how changes in human capital can impact economic growth.