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.
- 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 =
- Growth rate of output = + n
Output per unit of capital
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: