Question

How does the neoclassical growth model explain economic growth? Does it explain the impact of technology on output?

Answer 1

Neoclassical growth models propose that in the short run, economic growth can be achieved by combining labour and capital effectively. The impact of technological changes on the economic growth was also explained as technology was seen to determine the output of an economy. There are various neoclassical growth models like the Solow's growth model or the Solow-Swan growth model. The neoclassical growth theory was first proposed by Solow and Swan in the year 1956 and according to this theory the output of an economy is determined by three factors:

1. Labour

2. Capital

3. Technology

The production function is used to explain the growth of an economy, the production function can be denoted as:

Y= A* F(L,K)

where A stands for tecnhological change, L stands for labour and K stands for capital

When any of these inputs increase, the theory states that growth (GDP) of an economy will also increase.