New Growth Theory

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Definition of 'New Growth Theory'

The New Growth Theory is a macroeconomic theory that emphasizes the role of innovation and knowledge creation in economic growth. It is based on the idea that economic growth is driven by the accumulation of knowledge and the creation of new technologies.

The New Growth Theory was developed in the 1980s by economists such as Paul Romer, Robert Lucas, and Robert Solow. It is a departure from the traditional Solow growth model, which focuses on the role of capital accumulation in economic growth. The New Growth Theory argues that capital accumulation is not the only important factor in economic growth. It also emphasizes the role of innovation and knowledge creation.

The New Growth Theory has been influential in the field of macroeconomics. It has helped to explain the long-term growth rates of different countries and the differences in economic growth between countries. It has also led to new policies aimed at promoting innovation and knowledge creation.

One of the key insights of the New Growth Theory is that economic growth is not a zero-sum game. In other words, one country's economic growth does not necessarily come at the expense of another country's economic growth. This is because innovation and knowledge creation can create new markets and opportunities for growth.

The New Growth Theory has also been used to explain the increasing gap between rich and poor countries. The theory argues that rich countries have a higher rate of innovation and knowledge creation than poor countries. This is because rich countries have more resources available for research and development. They also have a more educated workforce and a more conducive environment for innovation.

The New Growth Theory has important implications for economic policy. It suggests that governments should focus on policies that promote innovation and knowledge creation. These policies include investing in research and development, education, and infrastructure. They also include creating a more conducive environment for innovation, such as by reducing regulations and providing tax incentives for research and development.

The New Growth Theory is a complex and evolving theory. It is still being debated by economists today. However, it has had a significant impact on the field of macroeconomics and has helped to shape our understanding of economic growth.

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