101 Concepts for the Level I Exam

Essential Concept 17: Theories of Economic Growth

Classical Model (also called Malthusian Theory)

Growth in real GDP per capita is temporary.
Rise in real GDP per capita above subsistence level results in a population explosion.
Real GDP per capita returns to subsistence level.

Neo-Classical Model

In steady state capital per worker and output per worker grow at equal sustainable rates.
Long-run per capita growth depends on exogenous technological progress.
Capital deepening has no impact on growth rate or on marginal product of capital.
There will be convergence of per capita income in developing and developed countries.

Three important relationships to remember are:

Growth rate of output per capita = $\frac{\mathrm{\ }\mathrm{\theta}}{\mathrm{1\ -\ }\mathrm{\alpha}}$
Growth rate of output = $\frac{\mathrm{\ }\mathrm{\theta}}{\mathrm{1\ -\ }\mathrm{\alpha}}$ + n
Output per unit of capital $= \frac{\mathrm{Y}}{\mathrm{K}}\mathrm{=}\left(\frac{\mathrm{1}}{\mathrm{s}}\right)\left[\left(\frac{\mathrm{\theta }}{\mathrm{1\ -\ }\mathrm{\alpha }}\right)\mathrm{+}\mathrm{\delta }\mathrm{+n}\right]$

Endogenous Growth Theory

Focus on explaining technological progress rather than treating as exogenous.
It states that there is no reason why incomes of developed and developing countries should converge.
A higher saving rate can permanently higher growth rate.

An important relationship to remember is:
$\mathrm{\Delta}y{}_{e}/y{}_{e} = \mathrm{\Delta}k{}_{e}/k{}_{e} = s c - \delta - n$