One of the most effective models in explaining Canada’s short-term growth rate is the Solow Model. It states that accumulation of capital drives an economy of a country towards economic growth. The CIDB aims to increase the amount of investment towards infrastructure development leading to the accumulation of capital for the future. There is also a certain amount of depreciation each year, which offsets the investment. The Solow Model is successful in giving us two important insights about capital accumulation and economic growth:
i) It explains that capital to output ratio is equal to the ratio of the investment rate to the depreciation rate. Hence, a higher amount of investment in infrastructure will increase the amount of capital to output ratio. ii) It is successful in explaining the transition dynamics of an economy. The far below an economy is from its steady state (investment rate = depreciation rate) the faster it will grow.
Growth eventually stops according to the Solow Model because investment and capital have diminishing