The Neoclassical Theory And Theories Of Economic Growth

Definition of Economic Growth

Economic growth refers to an increase in the goods and services produced by an economy over a particular period of time. It is measured as a percentage increase in real gross domestic product which is GDP adjusted to inflation. GDP is the market value for all the final goods and services produced in an economy.

Theories of Economic Growth

The classical Approach:

Adam Smith laid emphasis on increasing returns as a source of economic growth. He focused on foreign trade to widen the market and raise productivity of trading countries. Trade enables a country to buy goods from abroad at a lower cost as compared to which they can be produced in the home country. In modern growth theory Lucas has strongly emphasized

The first section is the competitive model of Walrasian equilibrium where markets play a very crucial role in allocating the resources effectively. To secure the optimal allocation of inputs and outputs, markets for labour, finance and capital have been used. This type of competitive paradigm was used by Solow to develop a growth model.

2. The second section of the neoclassical model assumes that technology is given. Solow used the interpretation that the technology in the production function is superficial. The point is that R&D investment and human capital through learning by doing were not explicitly

Measures to control Inflation

There are many ways of controlling inflation in an economy:

1. Monetary Measure:

The most important method of controlling inflation is monetary policy of Central Bank. Most central banks use high interest rates as a way to fight inflation.

Following are the monetary measures used to control inflation:

• Bank rate policy: Bank rate policy is the most common tool against inflation. The increase in bank rate increases the cost of borrowings which reduces commercial banks borrowing from the central bank.

• Cash Reserve Ratio: To control inflation, the central bank needs to raise CRR which helps in reducing the lending capacity of the commercial banks.

• Open market operations: Open market operations mean the sale and purchase of government securities and bonds by the central bank.

2. Fiscal Policy:

Fiscal measures are another important set of measures to control inflation which include taxation, public borrowings, and government expenses.

Some of the fiscal measures to control inflation are as follows:

• Increase in savings

• Increase in taxes

• Surplus