Neoclassical Growth Theory

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Definition of 'Neoclassical Growth Theory'

The neoclassical growth theory is a macroeconomic theory that explains economic growth. It is based on the idea that economic growth is driven by the accumulation of capital and labor, and by technological progress.

The neoclassical growth theory was developed in the 1950s and 1960s by economists such as Robert Solow, Trevor Swan, and James Meade. It is based on the Solow growth model, which is a mathematical model that describes how economic growth occurs.

The Solow growth model assumes that the economy is in a steady state, which means that it is not growing or shrinking. In the steady state, the capital stock, the labor force, and the output of the economy are all growing at the same rate.

The Solow growth model also assumes that there are two types of technological progress: labor-augmenting technological progress and capital-augmenting technological progress. Labor-augmenting technological progress increases the productivity of labor, while capital-augmenting technological progress increases the productivity of capital.

The neoclassical growth theory predicts that economic growth will slow down over time. This is because the capital stock will eventually reach a point where it is no longer profitable to invest in new capital. As a result, the rate of economic growth will decline.

The neoclassical growth theory has been criticized for a number of reasons. One criticism is that it does not take into account the role of institutions in economic growth. Another criticism is that it does not take into account the role of human capital in economic growth.

Despite these criticisms, the neoclassical growth theory remains one of the most important macroeconomic theories of economic growth. It provides a useful framework for understanding how economic growth occurs.

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