30 min
Episode 3: Drivers of Economic Growth: Neoclassical Growth Theory Finance School by PFS
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- Education
This podcast discusses the drivers of economic growth under the Neoclassical growth theory.
The economic output represents the aggregated activity of billions of people, influenced by forces seen and unseen. Despite the difficulties, economists cannot resist trying.
Forecasters usually rely on two different predictive approaches.
Theory-based: This one is shaped by how economists believe economies behave.
Data-based: This one is shaped by how economies have behaved in the past.
The simplest of the theoretical bunch is the Solow growth model, named for Robert Solow, a Nobel-prize winning economist.
Robert Solow developed a model that explained the contribution of labor, capital, and technology (total factor productivity) to economic growth. The model shows that the economy’s productive capacity and potential GDP increase for two reasons:
accumulation of such inputs as capital, labor, and raw materials used in production, and
discovery and application of new technologies that make the inputs in the production process more productive—that is, able to produce more goods and services for the same amount of input.
Solow's growth accounting equation shows that the rate of growth of potential output equals growth in technology plus the weighted average growth rate of labor and capital.
He also said that if capital grows faster than labor, capital will become less productive, resulting in slower and slower growth. According to his model, there are two major implications of potential GDP:
Long-term sustainable growth cannot rely solely on capital deepening investment that increases the stock of capital relative to labor. This means, increasing the supply of some input(s) relative to other inputs will lead to diminishing returns and cannot be the basis for sustainable growth.
Given the relative scarcity and hence high productivity of capital in developing countries, the growth rates of developing countries should exceed those of developed countries. As a result, there should be a convergence of incomes between developed and developing countries over time.
I have discussed some excerpts from the book ““Good Economics for Hard Times” by Abhijit V. Banerjee and Esther Duflo. Listeners might learn a lot by reading the book. In this podcast, I tried to relate the Neoclassical growth theory with the empirical evidence shown in the book.
This podcast discusses the drivers of economic growth under the Neoclassical growth theory.
The economic output represents the aggregated activity of billions of people, influenced by forces seen and unseen. Despite the difficulties, economists cannot resist trying.
Forecasters usually rely on two different predictive approaches.
Theory-based: This one is shaped by how economists believe economies behave.
Data-based: This one is shaped by how economies have behaved in the past.
The simplest of the theoretical bunch is the Solow growth model, named for Robert Solow, a Nobel-prize winning economist.
Robert Solow developed a model that explained the contribution of labor, capital, and technology (total factor productivity) to economic growth. The model shows that the economy’s productive capacity and potential GDP increase for two reasons:
accumulation of such inputs as capital, labor, and raw materials used in production, and
discovery and application of new technologies that make the inputs in the production process more productive—that is, able to produce more goods and services for the same amount of input.
Solow's growth accounting equation shows that the rate of growth of potential output equals growth in technology plus the weighted average growth rate of labor and capital.
He also said that if capital grows faster than labor, capital will become less productive, resulting in slower and slower growth. According to his model, there are two major implications of potential GDP:
Long-term sustainable growth cannot rely solely on capital deepening investment that increases the stock of capital relative to labor. This means, increasing the supply of some input(s) relative to other inputs will lead to diminishing returns and cannot be the basis for sustainable growth.
Given the relative scarcity and hence high productivity of capital in developing countries, the growth rates of developing countries should exceed those of developed countries. As a result, there should be a convergence of incomes between developed and developing countries over time.
I have discussed some excerpts from the book ““Good Economics for Hard Times” by Abhijit V. Banerjee and Esther Duflo. Listeners might learn a lot by reading the book. In this podcast, I tried to relate the Neoclassical growth theory with the empirical evidence shown in the book.
30 min