Solow Model The Solow Model states that by looking at productivity, capital accumulation, population growth and technological progress we can explain how long run economic growth can be achieved. The Solow Model also makes a clear distinction that new capital is more valuable than old capital. This is because since capital is produced based on new technology and technology is improved within time, then new capital will be more productive than old capital. One of the most important things any economy would like to achieve is a steady state. A steady state is a situation in which the economy’s output per worker, consumption per worker, and capital stock per worker are constant (Abel & Bernanke & Croushore, 2012, pg. 216). The rate of growth of an economy as it emerges to a steady state is determined by the rate of capital accumulation. Capital accumulation is in turn determined by the saving rate. Of course the higher the saving rate the high the amount of capital accumulation. The higher a countries saving rate the faster it will grow, however this is true only in the short run. In the long run, the Solow Model states that it is technological innovation rather than capital accumulation that sustains the growth. In fact capital accumulation might hinder growth in the long run because of the marginal productivity of labor, which will decrease. Thus saving while desirable in the short run is not in the long run, unless it is accompanied with technological innovation to offset the decreased marginal productivity of labor that occurs because of an increase of capital accumulation in the long run. Plus saving diverts money from consumption and the tradeoff would be short-term economic growth, which does not sound exciting. It is widely perceived that capital accumulation is the reason behind sustained economic growth. However, in the Solow model this is