Modelling the Economic Growth Rate of Ghana using the Solow Model

Abstract

The main objective of this study was to use the Solow growth model (Augmented Cobb-Douglas production function) as a basis to model the economic growth of Ghana during the period 1990 to 2010. Economic growth around the world has not been equal for a long time. Some economies grow faster than others. Economists have predicted that the slower growing economies will eventually converge to the faster growing economies at some point in time. In this study, we model the economic growth of Ghana using the Solow production model and applying growth differential equations. Starting from the estimates of the parameters from other studies, the growth model was simulated for the period 1990 to 2010. The recording and computation of the data was done using Matlab, SPSS and Excel. The computations were Capital, Labour force, Total Factor Productivity, and Total Production and the results from models were compared with the real GDP growth figures and variations noted.

The estimations from the model were compared with the actual figures from the Ghana Statistical Service, World Bank and Bank of Ghana. The model provides a good approximation of the dynamics of the Ghanaian economy for the 1990 to 2010 periods, with respect to the dynamics of the real aggregate GDP growth and to the ratios of the main macroeconomic variables, like production per worker, capital-output ratio or capital per worker.

The results showed a very close relationship between the actual and calculated growth rates over the periods 1990 to 2010. The actual average growth rate over the period was 4.5% as compared to the calculated average value of 4.21%. In conclusion, there was a correlation between the actual growth rates and the calculated but the strength was weak.

Keywords: Solow growth model, Economic growth of Ghana, Real GDP growth, Macroeconomic variables, actual and calculated growth rate