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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:

  1. Growth rate of output per capita = \frac{\mathrm{\ }\mathrm{\theta}}{\mathrm{1\ -\ }\mathrm{\alpha}}
  2. Growth rate of output =  \frac{\mathrm{\ }\mathrm{\theta}}{\mathrm{1\ -\ }\mathrm{\alpha}} + n
  3. 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

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