The Solow-Swan model, a neoclassical model of economic growth, asserts that
advances in technology, labor force expansion, and capital accumulation are the
primary drivers of long-term economic growth. It highlights the concept of
diminishing returns to capital, which states that the amount of additional output
produced by each new unit of capital decreases as more capital is accumulated.
Higher saving with growing capital investment first causes a dramatic increase in
output, but over time, the benefits of more investment fade. This finally reaches a
point when increasing capital increases production just marginally. It also suggests
that a stable point will finally be reached. indicating that there is no long-term
growth and that, eventually, richer and poorer countries should converge. The labor
force and technical developments dictate the steady-state rates of economic growth
in this stable condition. Without technical innovation, growth in production per
worker eventually comes to an end.It takes technical innovation to sustain long-term
economic development. For a example, China's labor force growth rate increased
significantly faster than the country's population growth rate until about 2010, at
which point it steadied and is predicted to fall over the following ten years. China
may soon need to switch public spending from capital expenditures to human capital
in order to sustain growth.Technology has made it possible to create more with the
same amount of labor and capital by raising the production function.Investing in
human capital via education, training, and health improves labor productivity.
Workers who are healthier and more adept at their jobs may use capital more
effectively, which raises overall output. Higher educated workers are more adept at
assimilating and utilizing new technology which helps China to overcome the limits.
