On Wealth, Waste, and GDP Growth: A Circular Solow Model

Abstract This paper extends the Solow model to incorporate circularity, whereby a portion of the waste generated by consumption is recycled into productive inputs. Because recycled waste functions as a resource, consumption contributes to capital accumulation. We explore implications of this non-standard mechanism for economic growth, showing among others: (i) in the steady state, the higher the recycling rate, all else equal, the higher the wealth-to-waste ratio, and (ii) in the transition, GDP growth surpasses that of the Solow model near the steady state, with the magnitude of this divergence rising with the share of output allocated to recycling. We conduct quantitative analysis to report three key ratios---recycling-to-output, waste-to-output, and wealth-to-waste---for the G7 countries. For the United States and Germany, we compare outcomes with and without recycling. Our finding is that Germany achieves greater wealth and GDP with recycling, whereas the United States does not. We show that, to realize economic gains from recycling, the United States needs to expand its recycling efforts. JEL Classification: O44, Q53, E21