The paper “ The Solow Model and Ramsey Model of Capital Accumulation” is an informative variant of the math problem on finance & accounting. The purpose of this research is to compare and contrast two economic growth models – the Solow model and the Ramsey model of capital accumulation – to understand whether economic growth influences income and wealth distribution. In all the economic growth research, experts take the Solow model as the starting point for every analysis that they conduct on economic growth (Barro). However, the Solow model has its own limitation and does not offer a method of endogenous savings.
On the other hand, the optimal growth theory of Ramsey from the late 1960s has influenced the consumers’ behavior modeling (King 128). However, such an approach is generally linked with superior dimensional dynamical systems. Therefore, using this approach most often makes the analysis intractable, even when the economic growth problem is a simple one. In the neoclassical growth theory, there are primarily two major modeling frameworks, namely the Solow model and the Ramsey growth model of capital accumulation. The most important distinguishing factor between these two models is the difference related to the behaviour of consumers (Cass 235).
For instance, the Solow model is known to establish credible consumption function with the support of some empirical data. However, the Ramsey model in its analysis assumes that the economy is inhabited by just one immortal representative household. This household optimally uses the consumption plan over a span of infinite time in an environment that is more institutional in nature (King 909). Further, the household transforms its wishes into the actual allocation of resources at the given point of time.
Also, the Ramsey model endogenously calculates consumption and saving, whereas, the Solow model believes that the representatives keep aside some significant and predictable portion of its output on a regular basis for the purpose of capital accumulation (Swan 345). Nonetheless, most of the other aspects of the Ramsey model is similar to that of the Solow model. For instance, the variables, such as Y(t), N(t), K(t), r(t), k(t), and w(t), used in the Ramsey model have similar connotations just as the Solow model (Uzawa 18).
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