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Is the Mankiw, Romer, and Weil Model Still Applicable for an Oil-Based Economy? An Econometric Study

By: Published: 2019 | Product: SAGE Research Methods Cases Part 2
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Growth and fluctuations in the Libyan gross domestic product depend on oil in particular. The Libyan economy is one of oil-based economies. This case study applies the Mankiw, Romer, and Weil formula of growth based on the model originated by Robert Solow to investigate the source of economic growth in Libya. The case study attempts to determine whether the Mankiw, Romer, and Weil formula offers an appropriate tool to explain the growth of natural-sourced economies. With data spanning more than five decades, we find that oil indeed played the most important role in growth and fluctuations in per-capita income in Libya over the studied period (1962–2014). In contrast, the role of capital accumulation has been less important than labor, while the role of human capital is unclear. The contributions of Total Factor Productivity to growth are often low and negative. Moreover, the Mankiw, Romer, and Weil model, based on Solow’s formula, has been found to be unable to explain the changes in per-capita output. This result supports the initial suggestion of Mankiw, Romer, and Weil. Meanwhile, the basic formula with only physical capital does explain the changes.

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