Solution analysis of Solow Growth Model for financial practices and applications

Abstract

Solow Growth Model (SGM) is an economic model that is exogenous in nature and examines the relationship between the output and input levels in an economy over a period of time. It projects long-term economic growth in relation to labour (population growth), savings rate, and technological development. However, traditional approaches to solving the Solow growth model may rely on complex mathematical techniques that might not give an accurate representation of real-world economic dynamics. Thus, this paper applies the Natural Decomposition Method (NDM) to the Solow growth financial model. The NDM is a numerical technique that combines the Natural Transform (NT) and the ADM-Adomian decomposition method. The NDM simplifies problem-solving by converting the original differential equations into algebraic equations as regards limitations associated with nonlinear models. From the results obtained by applying the NDM to the Solow growth financial model, researchers and policymakers can better understand the interplay between financial variables, such as savings rates, investment, and capital allocation, and their impact on economic growth dynamics, as a systematic approach to capturing the complex relationship between finance and economic development within the Solow framework is ensured. Further research and application of the NDM can contribute to advancing the knowledge of economic dynamics and support evidence-based decision-making in economic policy.

Keywords

• Solow-Growth Model
• Option pricing
• Analytical solutions