This website uses cookies to ensure you have the best experience. Learn more

Explain How The Neoclassical Growth Model Can Be Extended To Enhance Our Understanding Of Economic Growth.

1858 words - 8 pages

Explain how the neoclassical growth model can be extended to enhance our understanding of economic growth.

INTRODUCTION

AIM AND OBJECTIVE
The aim of this essay is to clarify how the neoclassical growth model can be used to explain economic growth by taking into account two new inputs: Natural Resources (R) and Land (T) by substantiating it with relevant research.

THE NEOCLASSICAL GROWTH MODEL
According to the Neoclassical Solow Model, economic growth arises due to influences outside economy. As an exogenous growth model it focus on four variables: output (Y), capital accumulation (K), Technology (A) and labor or population growth (L) in order to explain economic growth.
In 1798, Malthus raised the issue that once population growth had outpaced agricultural production subsistence-level conditions would result and hence, convinced other economists that natural resources, production and other environmental considerations are critical in the long run.

THEORETICAL ASSUMPTIONS OF THE MODEL

SOLOW MODEL
The analysis of the Cobb-Douglas function is now extended to include natural resources (R) and land (T).

BASELINE (130)
The analysis of the Cobb-Douglas function is now extended to include natural resources (R) and land (T). Thus the production function, now, becomes: Y(t)=K〖(t)〗^α R〖(t)〗^β T〖(t)〗^γ [A(t)L (t)]^(1-α-β-γ) where,
α>0, β>0, γ>0, α-β-γ<1
Whereas the dynamics of capital, labor and the effectiveness of labor are the same as before,
i.e. K ̇(t)=sY(t)-δK(t), L ̇(t)=nL(t) and A ̇(t)=gA(t) it is important to consider the new assumptions that concern the newly added inputs.
As such, because the amount of land is fixed and in the long run the quantities used in production cannot be increased, it is assumed that T ̇(t)=0.
Resources used in production are fixed as well and after being used in production the available quantities must decline. As such, regardless of evidence pointing out that resource use has been rising, it is assumed that R ̇(t)=-bR(t), b>0.

THE NEW EQUATION OF MOTION FOR CAPITAL AND THE BALANCED GROWTH PATH
With new inputs in the production function, focusing on K/AL as a way to analyze the economy is no longer effective as it no longer converges to a given value.
It is assumed that A, L, R and T each grow at a constant rate. In order to achieve a balanced growth path, both K and Y must grow at a constant rate as well.
It is implied by the equation of motion for capital K ̇(t)=sY(t)-δK (t), that the growth rate of K is
(K ̇(t))/(K(t))=s (Y(t))/(K(t))-δ, meaning that in order for the growth rate of K to be constant so has Y/K to be which leads to the inevitable assumption that Y=K.
By taking logs of both sides in the production function, it is possible to find when this condition is satisfied.

ln⁡〖Y(t)〗=α ln⁡〖K(t)〗+β ln⁡〖R(t)〗+γ ln⁡〖T(t)〗+(1-α-β-γ)[ln⁡〖A(t)〗+ln⁡〖L(t)〗 ]

By differentiating both sides of this expression with respect to time and being aware that the time derivative of the log of a variable is the...

Find Another Essay On Explain how the neoclassical growth model can be extended to enhance our understanding of economic growth.

Economic Growth Essay

781 words - 4 pages States faces two macroeconomic problems, two policy responses are, arguably, appropriate; a short term policy to sustain a cyclical recovery of economic growth and a long-term policy to trim government debt. There is no necessary tradeoff between these two objectives. They can be mutually reinforcing; a credible commitment to dealing with the long-term debt problem relieves investor uncertainty and increases the near term reason to spend, while

Explain the main factors that influence the rate of economic growth

477 words - 2 pages Explain the main factors that influence the rate of economic growth Economic growth will be different in M.E.D.Cs than it will be in L.E.D.Cs. The reason for this is that M.E.D.Cs are already developed and vast improvement may not be possible but in L.E.D.Cs they have a long way to catch up so it is easier for them to expand vastly. Economies like China and India have potential for vast economic growth because of a huge population. If

"Secular stagnation: The importance of economic growth"!

851 words - 3 pages call it, was possible. Underground water and sewer pipe were created. According to Robert Gordon, in the first half of the 20th century, the improvement of life expectancy was three times faster than it was in the second half. What have we done since? will we be able to match what was done during that time? Chances are we wont because economic growth is now negative. The problem is secular stagnation. Our population is not investing as much as they

The Ecological Consequences of Global Economic Growth

2079 words - 8 pages , natural resource availability, and waste receiving capacity as the reason why growth has to stop. However there are some positive outcomes as our knowledge of technology widens, enabling us to extract more economic activity from a given unit of natural resources. Therefore, we can try to learn how to control the amount of waste entering the environment by using technology to recycle materials and take waste gases

The Role of Globalisation in Economic Growth

2198 words - 9 pages ...........................................................................................................12 10. Appendices...........................................................................................................13 Executive Summary: International Trade is a key to economic growth for any country. There are number of international institutions who are engage to ensure that the countries whether developed, developing or under-developed must get

The Rise of China's Economic Growth

1722 words - 7 pages The economy has been a tough battle to fight and always will be a never-ending war for China as well as the rest of the world. China's biggest problem is the high population growth rate and finding enough food to feed everyone. During World War 2 food became scares and the government knew they needed to make some drastic changes for the country's wellbeing and in order to flourish in years to come.During World War 2 the People's Republic of

With Reference to a company of your choice, discuss how SMEs in South Africa can contribute to economic growth recovery and development.

2206 words - 9 pages markets (urban, rural, local, national, regional and international); embody different levels of skills, capital, sophistication and growth orientation, and may be in the formal or the informal economy. Statistically, in South Africa, SMEs are defined according to the number of employees, value of sales and/ or value of assets. There are five key areas namely: survivalist enterprise, micro enterprise, very small, small enterprise and medium

How Economic Growth Measurements Lead to Negative Externalities

1098 words - 5 pages who are not compensated by the firm, by contrast, negative consumption externality occurs when an individuals consumption reduces the well-being of other who are not compensated by the individual. In my essay I am going to discuss how excessive drive for economic growth in South Africa leads to negative externalities such as pollution namely air pollution, water pollution and noise pollution. Pollution causes the depletion of South Africa’s

BRICS: Pillars of Economic Growth

2047 words - 8 pages improve efficiency and innovation. It has been explained in endogenous growth model formulated by Romer (1986); that the accumulation of knowledge can be combined with physical capital to produce output. The ideas generate innovation which can enhance economic growth and more output. Secondly, technology is the invention created by human capital. These BRICS countries have improved greatly since earlier 1990s. For instance China and Russia both

China set to cool off its Growth. An essay about the recent high levels of economic growth in china. Economics

638 words - 3 pages China set to cool off its Growth.China is experiencing large economic growth to the point where it may not be sustainable without equally large inflation. But any reduction in rate of Chinese economy's growth will have little effects on neighboring Asian economies due in part to the current and anticipated growth of both U.S. and Japanese economies anticipated. It appears that the Chinese government is trying to take preemptive, measures

Understanding Population Growth

1222 words - 5 pages are grouped within. Studies conducted on these nations are significant as it helps us gain an understanding of the current position the country is in, and how it can develop into an industrialized nation. According to the demographic transition theory, countries are grouped within four phases ranging from pre-industrial to an industrialized based economic system. The demographic transition theory is a, “model of population change when

Similar Essays

An Overview Of How Can The Ppf Model Help To Explain The Issues Of Choice, Opportunity Cost, Growth And Unemployment

611 words - 2 pages , and can be used to explain a number of different issues, such as the issues of choice, opportunity cost, growth and unemployment.That is, the PPF model explains the effect all these different issues have on the economy. For instance, a PPF model, showing unemployment in the economy, demonstrates very effectively how, due to unemployment, the economy's resources are no longer fully employed and therefore is no longer as effective as it should

Can Growth Be Limitless? Essay

1936 words - 8 pages and the natural resources from our surroundings, many of this destruction occurs in developing countries and the extensive growth of the Western’s economy is ultimately leading to the exhaustion of nature’s resources. By understanding how we measure a countries wealth we can ultimately see what impacts this has and overall see what we depend on, our economy or environment and resources. Possible solutions may arise and impossible means of how to

The Desirability Of Economic Growth Essay

935 words - 4 pages the world stage. They have therefore more powerful voices on the international stage in organisations such as the United Nations, G8, or the World Trade Organisation. ) The Costs of Economic Growth ============================ 1. Pursuing economic growth policies can have some drawbacks, affecting the quality of life. Individuals will be required in a growing economy to learn new skills, be more flexible and often be more

Important !!! Beneficial To Everyone !!! Explain Economic Growth And Inflation

787 words - 3 pages For economic growth,in 1990 to 1997, it has a strong economic growth in Asia, but it did not help forecast the crisis from 1997. Due to the financial storm happened in 1997, the GNP growth fell 2.9 percent in 1998.The GNP means the market value of final goods and services newly produced by domestically owned factors of production. Moreover, it is not only the better way to reflect the economic situation of an economy but also is an important