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 ̇...
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...ount;
Intrinsic values (i.e. non-extinction of species) are not taken into account;
Solow was aware of the need for environmental and social accounting and suggested innovation would make it possible for individuals to take decisions precisely and rationally resulting in efficient trade-offs between environmental preservation and consumption.
Problematic because it assumes the possibility of complete information – doubtful as it is possible that some natural impacts are undiscovered or underestimated.
The model shows the hidden assumptions behind the notion of unlimited growth as opposed to predicting the optimum long-term output.
Stock of land is fixed and resource use should decrease, leading to a binding constraint on the ability to produce. In our model, this does not occur because it is assumed in the Cobb-Douglas functions that there are constant returns.
In Thomas More’s Utopia, agriculture is the foundation of the economy. The agricultural system embodies all citizens, men and women, to cultivate crops. Utopian agriculture is very industrious and according to More, the Utopians produce enough to supply their own nutritional needs as well as a reserve of food in case of hard times. More views the land primarily as an economic resource, although it is not to be taken for granted. Therefore, he designs his economy in a way that will not put strains on the limited resources of nature. The way he accomplishes this is simply by limited population growth. Although, More does not commend birth control, he establishes a city capacity. Thus, by avoiding concentrations of population, the Utopians are guaranteed to have even economic growth throughout the island. This in turn ensures that resources will be equally distributed between economic divisions and that not one piece of agricultural land will be subjected to more economic pressure than another.
The measure of growth is flawed, how countries see their growth is based on the consumption of their people. Many countries use the GDP (Gross Domestic Product) as an indicator for growth, as defined in It’s All Connected, “(GDP) is a calculation of the total monetary value of goods and services produced annually in a country” (Wheeler 11). The...
To begin many theories hold a number of assumptions about the markets, but neoclassical takes this to an extreme. NGT assumes that there is full employment, no externalities or transportation costs and perfect competition just to name a few from the slew of others. This large amount of assumption is one reason why Romer established EGT in his 1986 dissertation (Fine) . These assumption are numerous and rather important in an economy and to assume all of these things it starts to take away from its real world application. Endogenous growth theory seeks to explain many of the assumptions that NGT hold constant. One such assumption is that technology is a constant and steady
According to Ricardo, when the rent earned by a landlord is due solely to superior fruitfulness of the land, that rent is called rent on the extensive margin and no one pays rent in a newly settled country in which fertile soil is abundant. The rent is the output ...
Smith’s theory of economic growth can be formulated in a simple algerbraic equation. Where G equals the growth rate, K equals the ratio of productive to unproductive labor, P equals the productivity rate and W equals the real wage:
While growth rates of GDP per capita vary, it is not always the poorest countries that seem to see the highest growth rates. The differences in GDP per capita are greater today than any other time in the world’s history. These differences were relatively small before the early nineteenth century when the gap became more divergent during the Industrial Revolution (Parker, 2013). Living standards in many of the poorer countries are from prolonged but small changes. “The Mystery of Economic Growth” starts by showing the divergence of countries by show casing growth rates and living standards differences in courtliness during the post-World War II era. The book presents the Solow (1956, 1957) model to introduce the insights of the effects of growth of capital accumulation. The results from this lead to the question of “what are the forces of divergence in the world economy” (Helpman, 2010: 15). One can predict from the Solow model is economies will converge. For this model to hold and be true this must be true in every situation. The world economies accelerated growth rate cannot be explained by the forces of accumulation described by the Solow model which would predict a convergence and a declining growth rate. The limitation of this model is that it assumes that all countries have the same technological progress. To help expand the model with the concept of accelerated growth, technical innovation must
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The graph shows the results that were expected from the land use questionnaire. In the tables, the trend in the graphs show the total’s and average’s over 147 years.
Economic growth can be defined as increases in per capita real GDP (gross domestic product) measured by its rate of change per year. Growth rates are very important because even a small change can make vast difference in the coming years. The knowledge of economic growth is also important because it can provide the means to allow us to gain valuable insights. According to Robert D. McTeer, president and chief executive officer of the Federal Reserve Bank of Dallas, two factors determine the rate of economic growth: productivity increases (more output for the same amount of inputs), and labor (the number of hours worked).
Theodore Schultz won the 1979 Nobel Prize in Economics and in his accepting speech he said: “Most of the people in the world are poor, so if we knew the economics of being poor we would know much of the economics that really matters. Most of the world's poor people earn their living from agriculture, so if we knew the economics of agriculture we would know much of the economics of being poor” (Schultz, 1979). Thirty five years later and the phenomenon still exists that the poorer countries are mainly dependent on agricultural activities and that their share in world economics are weak, and industrialised countries develop faster and has better economic growth rate. Millennium Development Goal (MDG) was set in place in 2000, to half the poverty and increase incomes of the world by 2015. Well we are one year away from this and even though there has been some progress in limiting poverty and economic growth according to the World Bank reports, but to further this poverty demolishment focus has to be put on how to do it, and put strategies in place to achieve this goal. The question that we need to ask is what causes economic growth?
He argued that land taxes are superior to property taxes. He asserted that land taxes, in contrast to property taxes, do not penalize entrepreneurs for the development of their land. While property taxes will go up with time with the development of land, land taxes will stay the same, so that the marginal cost for development is lower when only land taxes are in place. The development of land is certainly potentially positive for society, as it encourages the growth of business and other economic
What does factors of production got to do with land? Well Land isn’t all about where a business is located. It’s mostly about the natural resources, which for example are diamonds, wood, water, coal, gold, etc. And this deserves to be ranked first. I think so because with no resources no business won’t be able to run successfully. Aswell most resources have scarcity to create an product with could cause a business owner to look for for an alternative resource. If there wasn’t land in the factor of production, most of the businesses would fail because they won’t be making money by not being able to create products. So overall land should be first since you got to have resources in order to create other new products.
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In order for any country to survive in comparison to another developed country they must be able to grow and sustain a healthy and flourishing economy. This paper is designed to give a detailed insight of economic growth and the sectors that influence economic growth. Economic growth in a country is essential to the reduction of poverty, without such reduction; poverty would continue to increase therefore economic growth is inevitable. Through economic growth, it is also an aid in the reduction of the unemployment rate and it also helps to reduce the budget deficit of the government. Economic growth can also encourage better living standards for all it is citizens because with economic growth there are improvements in the public sectors, educational and healthcare facilities. Through economic growth social spending can also be increased without an increase of taxes.