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?

Through analysing the data presented by Penn Wharton at the University of Pennsylvania, one can find that the capital labour ratio has stayed on the projected trend from pre-1980. This shows a steady growth of the average worker’s productivity and wages, as stated in the article. From this we can say that, at even the

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 relationship between the amount of labor & capital employed and the law of diminishing marginal productivity

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 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.

Without dismissing earlier attempts, the foundations upon which modern economic growth theory rests on the foundations put by US

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

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

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.

Farani et al, (2012) highlights that a‘GDP is a common statistic for representing the income level of a particular country within a certain time range. Study about finance- growth nexus always use GDP as the principal variable reflecting economic growth. We use gross fixed capital formation (GFCF) as a representation of investment in order to measure net new investment during an accounting period. It is to be noted that the financing variable applied in this model is a portion of total financing in the economy provided by Islamic banks’.

Robert Solow explained growth in output as a result of capital accumulation and technological progress. However, there is a limitation; it fails to explain how and why technological progress occurs.

. . . . . . . . . . . . . . . . 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

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.