1

Solow-Swan Growth Model:

Calibration Tutorial Using MS-Excel
2
Simple Solow Economy
Consider a simple Solow Economy with two factor of
productions (K & L)

Production Function is Neo-Classical:

Labor and Capital Shares in Production Function are
fixed over time.

Solow-Residual (A
t
) is completely exogenous.

Saving Rate (0<s<1) is also exogenously determined.
( , )
t t t t
Y F K AL =
3
Simple Solow Economy
Depreciation Rate:
Constant Productivity Growth (g)
Constant Population (Labor) Growth (n)
Capital Accumulation:





OR

0 1 o < <
1 t t t t
K K sY K o
+
= +
1 t t t
K sY K o
+
A =
1 1 t t t
K sY K o

A =
4
Parameters for Calibration
Parameter
Savings Rate: 0.050
Depreciation Rate: 0.025
Productivity Growth: 0.020
Population Growth: 0.010
Capital Share: 0.330
5
Open MS-Excel Worksheet
Parameters
Variables
Initial or Base Period
Consider values of all variables in initial period is 1
6
Growth Formulas:
In general growth rate is calculated as:


If Growth is given, then how growth is
added to level at any period t?


OR

1
1
( )
t t
t
t
X X
Gr X
X

| |

=
|
\ .
1
( ) 1
t
t
t
X
Gr X
X

=
| |
1
1 ( )
t t t
X X Gr X

= + +
7
Series Construction
| |
1
1 ( )
t t t
X X Gr X

= + +
Previous level value
We need to copy the same formula for other periods
So, growth rate cell value should be fixed. In Excel, cell can
Be fixed by using $ operator, before and after cell path
8
Series Construction
Use same formula for all other periods and get
Series of At (TFP)
9
Series Construction
Similarly Labor Series can also
Be formulated
Dont Forget to put $ here
10
Series Construction
1 1
(1 )*
t t t
K K sY o

= +
11
Series Construction
12
Series Construction
Consider Production Function is
Cobb-Douglas
1
( )
t t t t
Y K AL
o o
=
Capital Share
Power operator
13
Series Construction
14
Counterfactual Experiments
Savings Rate 0.010 0.02 0.030 0.04 0.050
Growth (y) Growth (y) Growth (y) Growth (y) Growth (y)
Periods
1 1.51 1.84 2.18 2.52 2.85
2 1.52 1.86 2.20 2.53 2.85
3 1.53 1.88 2.22 2.54 2.86
4 1.54 1.89 2.23 2.56 2.86
5 1.55 1.91 2.25 2.57 2.87
6 1.56 1.93 2.26 2.58 2.87
7 1.57 1.94 2.28 2.59 2.88
8 1.58 1.96 2.30 2.60 2.88
9 1.60 1.98 2.31 2.62 2.89
10 1.61 1.99 2.33 2.63 2.89
11 1.62 2.01 2.35 2.64 2.90
12 1.63 2.03 2.36 2.65 2.90
13 1.65 2.04 2.38 2.66 2.91
14 1.66 2.06 2.39 2.67 2.91
15 1.67 2.08 2.41 2.68 2.91
16 1.69 2.09 2.42 2.69 2.92
17 1.70 2.11 2.44 2.70 2.92
18 1.71 2.13 2.45 2.71 2.92
19 1.73 2.15 2.47 2.72 2.93
20 1.74 2.16 2.48 2.73 2.93
15
Counterfactual Experiments
Depreciation Rate 0.010 0.02 0.030 0.04 0.050
Growth (y) Growth (y) Growth (y) Growth (y) Growth (y)
Periods
1 3.34 3.01 2.68 2.35 2.01
2 3.33 3.01 2.69 2.37 2.05
3 3.32 3.01 2.70 2.39 2.08
4 3.31 3.01 2.71 2.41 2.11
5 3.30 3.01 2.72 2.44 2.15
6 3.29 3.01 2.73 2.46 2.18
7 3.29 3.01 2.74 2.48 2.21
8 3.28 3.01 2.75 2.50 2.24
9 3.27 3.01 2.76 2.51 2.27
10 3.26 3.02 2.77 2.53 2.30
11 3.25 3.02 2.78 2.55 2.33
12 3.25 3.02 2.79 2.57 2.35
13 3.24 3.02 2.80 2.58 2.38
14 3.23 3.02 2.80 2.60 2.41
15 3.23 3.02 2.81 2.62 2.43
16 3.22 3.02 2.82 2.63 2.45
17 3.21 3.02 2.83 2.65 2.48
18 3.21 3.02 2.83 2.66 2.50
19 3.20 3.02 2.84 2.68 2.52
20 3.20 3.02 2.85 2.69 2.55
16
Counterfactual Experiments
Similarly you can perform experiments by
increasing/decreasing population growth rate
and total factor productivity growth rate.
Then compare you results with the Solow
Models predictions.