Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Tutoring
  • Home
  • Economics, Finance, & Analytics
  • Economic Analysis & Monetary Policy

Neoclassical Growth Theory - Explained

What is Neo-Classical Growth Theory?

Written by Jason Gordon

Updated at April 24th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is Neoclassical Growth Theory?How is Neoclassical Growth Theory Used?The Production Function of the Neoclassical Growth TheoryTechnology's Influence on the Growth TheoryReal Word ExampleAcademic Research on Neoclassical Growth Theory

What is Neoclassical Growth Theory?

In economics, the neoclassical growth theory is an economic model that maintains that the stability of economic growth rests on three major factors:

  • the availability of capital,
  • the availability of labor, and
  • State of technology.

These factors influence the growth of the economy significantly. Robert Solow and Trevor Swan developed the neoclassical growth theory, this theory is sometimes referred to as the Solow-Swan model. Right from 1956, the neoclassical growth theory has been the model for long-run economic growth.

Back to: ECONOMIC ANALYSIS & MONETARY POLICY

How is Neoclassical Growth Theory Used?

The neoclassical growth theory is one that maintains that a well-adjusted capital, labor and technology is important for a stable economic growth. For this to happen, a temporary equilibrium is required, that is, for an economy to function adequately, a proportional capital size and appropriate labor coupled with technology must be in place. This is however, different from a long-term equilibrium that features none of the three factors. The theory also places much importance on the role of technology in the growth of an economy. Here are the key points you should know about the neoclassical growth theory;

  • The theory was introduced in 1956 and has since then been used as a long-run economic growth.
  • The theory was introduced by Robert Solow and Trevor Swan.
  • Steady economic growth is derived from three factors which are; labor, capital and technology.
  • The role of technology in economic advancement is crucial according to the neoclassical growth theory.

The Production Function of the Neoclassical Growth Theory

The economic growth that a country enjoys and the equilibrium of the economy is determined using the neoclassical growth theory. The formula for estimating neoclassical growth theory is; Y = AF (K, L). Y symbolises the GDP of a country. K stands for share of capital L is the level unskilled labor in an economy A symbolises the level of technology. According to this theory, despite the fact that the capital accrued by a country is important to economic growth, the integration of technology as well as labor productivity are also crucial to achieving a stable economic growth.

Technology's Influence on the Growth Theory

The influence of technology on the economic growth of a nation is crucial, so also the other two driving forces of the economy; labor and capital. It is important to know that these three factors have diverging influence on the economy. While technology has a limitless impact on the stable growth of the economy, the influence of unskilled labor and capital can diminish due to certain factors.

Real Word Example

The neoclassical growth theory is not only in theory, it is also in practise. Technological innovations however play an immeasurable role in the growth of an economy. The role of technology in the neoclassical growth theory examined in a study carried out by Dragoslava Sredojevi, Slobodan Cvetanovi, and Gorica Bokovi in 2016. These authors in their study considered technology as a major contributor to the economic growth.

Related Topics

  • Real Economic Growth Rate
  • Fox-Trot Economy
  • Stagnation
  • Neoclassical Growth Theory
  • Exogenous Growth Theory
  • Endogenous Growth Theory
  • New Growth Theory - Explained
  • Classical Growth Theory - Explained
  • Real Economic Growth Rate - Explained
  • Plutonomy




neoclassical growth theory neo-classical growth theory

Was this article helpful?

Yes
No

Related Articles

  • American Customer Satisfaction Index - Explained
  • Abenomics - Explained
  • Time Preference Theory of Interest - Explained
  • Balanced Trade - Explained



©2011-2023. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand