As is shown in the diagram, the growth rates of the population are respectively n 1and n2, and n2> n1. An increase of the growth rate of population from n 1to n2 shifts the line upward. As a result, the steady state of the economy has a lower level of capital per worker which is k*2. And the initial level of capital per worker is k*1. So it becomes obvious that the economies with a higher growth rate of population will have a lower level of capital per worker and therefore lower incomes. The level of output per worker y=f (k*2) is lower. Thus in the Solow model, the economies with higher growth rate of population will have a level of GDP per person.
According to the Solow model, those developed countries have lower growth rate of the population which means they have much higher rates of capital per worker. So the profit of per capital is much lower in developed countries than in developing countries, which leads a flow of the capital from the richest countries to poor ones.
In basic Solow model, the accumulation of capital can't explain the enduring economic growth. The saving increases the economic growth temporarily though at last the economic system comes to a stable situation. After that, the population growth is included in the model to explain the enduring growth of the economy. In the stable situation, the economy grows at the speed of the population growth. And the exogenous factor, technology, is supposed to keep the economy grow in the long tern. But in Romer model, the population growth is less important. More factors are taken as endogenous such as technology and knowledge which promote the economy. The enduring growth is owned to those endogenous factors. Those are different in the two models.
One pattern is that many countries not only enjoy the long term growth of the economies but also the enduring increase of the living standard, which can’t be explained by the Solow model even the population growth is included.
The high saving rate is supposed to explain temporary growth of the economy in the Solow model. But China has witnessed a great economic development in the long term which does not consist with the theory.
The leading indicators of the business cycle are indicators used to forecast the changes of the economy and the business cycle in one country. By analysing those leading indicators, the business men may predict the phrase of the business cycle the economy will go through. This will allow them to arrange their business in advance, make more profit and avoid risks.
For a small export oriented economy, the leading indicators can be the NAPM (The National Association of Purchasing Managers) index, which exhibits the manufacturing performance in the past and predicts the future economic activity, and changes in the inventories, which indicates the changes in the aggregate demand predicting the future economy.
For a large economy with small exports, the leading indicator can be the fixed investment. It represents the change in the stock of installed capital in the economy.
Whether the stock market is a leading indicator of the business cycle depends on the situation of the economy. If the market is perfect and all the information can be exhibited in the stock market, than it can be used to predict the future of the economy. But in those countries which stock markets are affected greatly by the governments themselves not the markets, then there are twists in the performance of stocks. It can’t be the leading indicators of the business cycle.
4、The rules of borrowing and debts for families and countries are different. Firstly, the objectives are different. For countries, it borrows for the long term development and for some political reasons, and usually the debts are in a large amount. While for a family, it may just for a temporary support. Secondly, the decisions made by the country are not just a combination of families. There is an individual rationality and collective irrationality phenomenon. The perfect rules for families are not definitely suitable for the whole country.