Neoclassical Growth Theory
What Is the Neoclassical Growth Theory?
Neoclassical growth theory is an economic theory that frames how a consistent economic growth rate results from a combination of three main thrusts — labor, capital, and technology. The National Bureau of Economic Research names Robert Solow and Trevor Swan as having the credit of creating and introducing the model of long-run economic growth in 1956. The model previously thought to be exogenous population increments to set the growth rate at the same time, in 1957, Solow incorporated technology change into the model.
- Robert Solow and Trevor Swan originally presented the neoclassical growth theory in 1956.
- The theory states that economic growth is the aftereffect of three factors — labor, capital, and technology.
- While an economy has limited resources in terms of capital and labor, the contribution from technology to growth is unlimited.
How the Neoclassical Growth Theory Works
The theory states that short-term equilibrium comes about because of differing amounts of labor and capital in the production function. The theory also contends that technological change impacts an economy, and economic growth can't go on without technological advances.
Neoclassical growth theory frames the three factors essential for a developing economy. These are labor, capital, and technology. Nonetheless, neoclassical growth theory explains that transitory equilibrium is unique in relation to long-term equilibrium, which doesn't need any of these three factors.
Special Consideration
This growth theory posits that the accumulation of capital inside an economy, and how individuals utilize that capital, is important for economic growth. Further, the relationship between the capital and labor of an economy determines its output. Finally, technology is remembered to expand labor productivity and increment the output capacities of labor.
Hence, the production function of neoclassical growth theory is utilized to measure the growth and equilibrium of an economy. That function is Y = AF (K, L).
- Y means an economy's gross domestic product (GDP)
- K addresses its share of capital
- L depicts the amount of unskilled labor in an economy
- An addresses a determinant level of technology
Notwithstanding, on account of the relationship among labor and technology, an economy's production function is much of the time re-composed as Y = F (K, AL).
Expanding any of the information sources shows the effect on GDP and, hence, the equilibrium of an economy. Nonetheless, assuming the three factors of neoclassical growth theory are not all equal, the returns of both unskilled labor and capital on an economy reduce. These lessened returns suggest that expansions in these two data sources have exponentially decreasing returns while technology is unlimited in its contribution to growth and the subsequent output it can create.
Illustration of the Neoclassical Growth Theory
A 2016 study distributed in Economic Themes by Dragoslava Sredojević, Slobodan Cvetanović, and Gorica Bošković named "Technological Changes in Economic Growth Theory: Neoclassical, Endogenous, and Evolutionary-Institutional Approach" inspected the job of technology specifically and its part in the neoclassical growth theory.
The creators find a consensus among various economic viewpoints all points to technological change as a key generator of economic growth. For instance, neoclassicists have historically compelled a few legislatures to invest in logical and research development toward innovation.
Endogenous theory allies accentuate factors like technological spillover and research and development as catalysts for innovation and economic growth. Finally, evolutionary and institutional market analysts think about the economic and social environment in their models for technological innovation and economic growth.
