In this chapter, we will see how the Solow model or its simple extensions can be used to interpret both economic growth over time and cross-country output differences.

The focus is on proximate causes of economic growth, that is, the factors such as investment or capital accumulation highlighted by the basic Solow model, as well as technology and human capital differences.

There are multiple ways of using the basic Solow model to look at the data. I start with the growth accounting framework, which is most commonly applied for decomposing the sources of growth over time. After briefly discussing the theory of growth accounting and some of its uses, I will discuss applications of the Solow model to cross-country output differences. In this context, I will also introduce the augmented Solow model with human capital, and show how various different regression-based approaches can be motivated from this framework. Finally, I will illustrate how the growth accounting framework can be mod­ified to a “development accounting framework” to form another bridge between the Solow model and the data. A constant theme that emerges from many of these approaches concerns the importance of productivity differences over time and across countries. The chapter ends with a brief discussion of various other approaches to estimating cross-country productivity differences.

3.1.