Technological progress and the Solow Residual

In a comment to the July 6th lecture notes post, Elaine asked,

How does the Solow Model explains technology growth as exogenous and how this relates to the Solow Residual. Can you please clarify?

The answer to that is in the handout from Todaro & Smith book. The relevant pages are 128-9. Quote

The Solow neoclassical growth model . . . differed from the Harrod-Domar formulation by adding a second factor, labor, and introducing a third independent variable, technology, to the growth equation. Unlike the fixed-coefficient, constant-returns-to-scale assumption of the Harrod-Domar model, Solow’s neoclassical growth model exhibits diminishing returns to labor and capital separately and constant returns to both factors jointly. Technological progress became the residual factor explaining long-term growth, and its level was assumed by Solow and other neoclassical growth theorists to be determined exogenously, that is independently of all factors in the model.

I have highlighted in yellow in the quote above the answer to Elaine’s question. The Solow model assumes — does not explain — technological progress, and the claim is that the Solow residual (the bit of growth that is not accounted for by capital accumulation and labor force growth) is due to technological progress.

Thanks for the question, Elaine.

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