Our mission is to provide an online platform to help students to discuss anything and everything about Economics. Before publishing your Articles on this site, please read the following pages: It will be seen from the table that growth of capital and improvement in total factor productivity (i.e., technological progress) have been the important sources of economic growth, especially in case of economic growth in Japan and European countries. 0000002316 00000 n There­fore, improvement in technology is generally measured by growth in total factor productivity (TFP). A significant conclusion of neoclassical growth theory is that if the two countries have the same rate of saving and same rate of population growth and have access to the same technology (i.e. Here f (k) is an increasing function of k (figure 1). The central equation of the model can be written as A kt+1 = s f (kt) – dkt. Steady-state rate of growth of per capita income, that is, long-run growth rate is determined by progress in technology.

Although saving rate does not determine the steady-state growth rate in output, it does cause an increase in steady-state level of per capita income (and therefore also total income) through raising capital per head.

It will also be noticed from the production function equation (1) that technology (A) has been taken to be a multiplicative factor. Thus human capital or knowledge and education are the important missing factor in the growth equation of neoclassical economists, Solow and Denison. Solow assumed constraint returns to scale which implies if each factor in the production function increases by one per cent, output also increases by one per cent. Since investment in promotion of knowledge or education makes workers and machine more productive, the workforce equipped with knowledge and education is often called human capital which is regarded by modern economists as an important source of economic growth.

Note that improvement in technology causes output increases with the given factor supplies. Besides, increased knowledge raises the productivity of capital and raises the return to investment in capital goods. a) Rewrite production function Y = K13 L 2 If there is no technical progress, then output per capita will ultimately converge to steady- state level. 0000001684 00000 n An important issue in growth economics is what contributions of different factors, namely, capital, labour and technology make to economic growth? 0000001834 00000 n 7. Neoclassical growth theory explains that output is a function of growth in factor inputs, especially capital and labour, and technological progress. However, some economists such as Denison and those associated with World Bank emphasise economies of scale or what is also called increasing returns to scale as a separate factor determining the rate of economic growth. In the above growth accounting equation one factor, namely, knowledge or education, is missing which has been stressed among others by Nobel Laureate Prof. Amartya Sen as an important factor contributing to economic growth.

Or Growth of Output = (Share of Capital x Growth in Capital) + (Share of Labour x Growth in Labour) + Technical Progress (or Growth in Total Factor Productivity) Where, θ denotes share of capital in national product, 1-θ share of labour in national product. Such technological change is generally referred to as neutral technological change. It may be noted that increase in knowledge or education increases the productivity of workers by improving their productive skills and abilities. 0000001524 00000 n Solow assumed constraint returns to scale which implies if each factor in the production function increases by one per cent, output also increases by one per cent. The parameters of the model are given by s= 0:2 (savings rate) and = 0:05 (depreciation rate). 0000000902 00000 n The production function (or Solow growth model) is used to determine the economy’s underlying source of growth. This implies that progress in technology increases the marginal productivity of both capital and labour uniformly. The production takes place according to the linear homogeneous production function of first degree of the form.

In Table 14.1 we present the contributions made by capital, labour and total factor productivity (i.e., technical improvement) in growth of output in the United States, Japan and the major countries of Europe in the two periods 1960-73 and 1973-90. 0000001502 00000 n 0000000805 00000 n production function), their levels of per capita income will eventually converge, that is, they will ultimately become equal. The increase in labour force contributes to rate of economic growth equal to the labour share (1 – θ) in national product multiplied by the growth in labour force (∆L/L); and 3. 5.

(Note: A Is Total Factor Productivity).

3. 6. The technological improvement ∆ A/A which is measured by the increase in total factor productivity also makes an important contribution to economic growth.We can formally prove the growth accounting equation explained above. The contribution of increase in capital to the growth in output (G or ∆Y/Y) is given by increase in (∆K/K) capital multiplied by the share (θ) of capital in national product; 2. 4.

Questions: Suppose that you have a standard Solow model with a Cobb-Douglas production function, f (kt) Aký. 1.



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