Economic Growth and Standard Neoclassical Model Essay

18. If the production function for an economy had constant returns to scale, the labour force doubled, and all other inputs stayed the same, what would happen to real GDP?

Y=A*K, Y is the output, A is the productivity (mainly dependent on technology), K is the capital. From the definition we know the function represents constant return to scales. Therefore there would be no convergence between the growths of developed countries and developing countries, with different starting capital and productivity.

10. Labor force growth rates tend to fall as a country becomes richer. Compared with the standard Solow growth model, this would lead to: a. b. c. d. Higher saving rates in rich countries than in poor countries. Greater income differences between rich and poor countries. Smaller income differences between rich and poor countries. Lower depreciation rates in

The Solow Model is designed to show how the growth in the labour force, capital stock and advances in technology interact and how they affect a nations total output. The model is important for the analysis of economic growth in developing countries as it demonstrates the nature of an economy to be a key determinant of steady-state capital stock within a country. If the savings rate is high, the economy will have a large capital stock and thus high level of output and vice versa. Correspondingly changes in capital stock can lead to economic growth.

Capital inherently generates an annual surplus, which in turn influences the level of variable capital employed. The surplus produced by capital is divided into revenue for the capitalist or reinvested in production. This reallocation of surplus ultimately determines the degree of accumulation (if more capital is reinvested, and less kept as revenue for consumption, then accumulation will be higher). It also has an effect on wages and the demand and supply of labour (i.e. components of variable capital). Supply increases absolutely, as does the demand for labour (if the variable capital needed for the operation of constant capital is unaffected) and wages will grow if

The Solow growth model was created by Robert Solow and was introduced to show how factors of production and advances in technology effect the nation’s total output. The model is made up of two components being the production and investment functions. This essay will discuss the possible effects, aspects and traits that an increase in population will have on the steady-state of the Solow growth model. This analysis will be followed by the effects of population growth on the growth rates in the model also. Paul Romer’s ideas that he has introduced to improve the Solow growth model alongside additional general elements will round the discussion to reach a conclusion involving the three elements of overall growth, limitations and Paul Romer’s ideas.

Even though knowing the production function used in a model provides plenty of useful information about the assumptions made, it does not reveal everything we need to know. In this essay, I will attempt to analyze what information is provided and what is not by the sole knowledge of the production function of the model. I will do that by studying individually each production function we discussed in class. We will make a clear distinction between models with regard to whether exogenous or endogenous technological advancement is assumed. In the first group, Solow (1956), Swan (1956), Cass (1965) and Koopmans (1965) all use the same production function, i.e. the neoclassical production function, while gradually advancing the neoclassical model

Economic growth refers to the rate of increase in the total production of goods and services within an economy. Economic growth increases the productivity capacity of an economy, thereby allowing more wants to be satisfied. A growing economy increases employment opportunities, stimulates business enterprise and innovation. A sustained economic growth is fundamental to any nation wishing to raise its standard of living and provide a greater well being for all. Gross domestic product (GDP) is the monetary value of all final goods and services produced over a year. It is the total value of production within the economy. The total value of production is the total value of the final goods or services less the cost of

and to think through as well as explain the various steps of the Solow growth model and

The student should see that the existing values of i and Y will have a tendency to change. The interest rate will fall because there is a shortage of bonds and as the price of bonds rises to drive the bond market to equilibrium, the interest rate will fall. The equilibrium interest rate, of course, will be found at the intersection of the Ms and Md schedules. Output will increase because a falling interest rate will trigger higher investment expenditures by firms. The increased I will increase AD and, therefore, Ye will increase. But then the higher income will shift money demand up, which will increase the equilibrium interest rate, and the same chain will be triggered leading to a decrease in the equilibrium level of output. The student undoubtedly knows that, eventually, after running through a series of converging loops, the system will settle into a mutually compatible, or general equilibrium, combination of i and Y. If you think the iteration process is a messy and cumbersome means of calculating the general equilibrium, or final, resting place of i and Y, you should applaud the use of the IS/LM graph. In one quick graph, we can immediately and easily see the system's general equilibrium solution. From our initial i0, Y0 combination, the IS/LM graph allows us to instantly see the final solution and to predict a decrease in interest rates and increase in output. However, a drawback is that it does not show how or why

. . . . . . . . . . . . . . . . 2.2.2 Development of the Dependency Ratio . . . . . . . . . 2.2.3 Influence on Economic Growth . . . . . . . . . . . . . 3 Population-Control-Policy in the Solow Model 3.1 Theoretical Analysis of the Solow Model . . . . . . 3.1.1 Solow Model with Constant Capital Stock . 3.1.2 Solow Model with Dynamic Capital Stock . 3.2 Combining Data and Neo-Classical Growth Theory 5

The model starts with a neoclassical production function Y/L = F(K/L), rearranged to y = f(k), which is the red curve on the graph. From the production function; output per worker is a function of capital per worker. The production function assumes diminishing

The authors have studied the Solow Model of economic growth, which assumes the neoclassic production function of decreasing returns to capital. Solow proposed the model while considers the rate of saving and population growth as exogenous and demonstrated that the countries reach the steady state level of income per capita. However, the classical Solow model is not able to explain cross-country variation in the standard of living. The Solow model predicts the effect of saving and population growth on economic growth qualitatively but not quantitatively .The authors have augmented the Solow model with accumulation of Human capital as well as physical capital. The authors have analyzed empirical data of year1965-1985 with the textbook Solow model & augmented Solow Model for three different samples including Non-oil, Intermediate and OECD. The authors demonstrated that augmented Solow model is still valid to explain the international variation in income per capita.

His theory can be simplified as the following model: Y = f(L, K, N), whereby Y represented aggregated output, L for labour, K for capital and N for land. A key parameter in deciding the economic growth can be noted here as “L”-labour. After Smith, Harrod-Domar model was set up as another way of examining economic growth. In this model, economic system is balanced on a “knife-edge of equilibrium growth” where the increase rate of labour force was illustrated as one of the three key parameters for economic growth (Solow, 1956, p. 65). Robert Solow and Trevor Swan raised a neoclassical model of growth as: Y = f (K, AL), whereby labour as “L”, plus capital(K) and technology(A) were put forward as three factors prompting economic growth (Mankiw,1995, p. 276). Though with different mathematical models, these theories altogether have provided a strong proof that any changes happened in labour factor will finally cause either increase or fall of the economy of a nation.

According to Balami (2006) In the long run, the rate of growth of (per capita) GDP is determined by population growth and the rate of technical progress. Higher investment can speed up growth temporarily, but as the capital-output ratio rises, an increased proportion of GDP needs to be invested to equip the increasing labour force, and the capital-output ratio converges towards a finite limit, however high a proportion of GDP is invested. Low investment slows down growth, but the capital-output ratio falls towards a lower limit which is always positive for positive investment.