What are the theories of economic growth and development?

Question

What are the theories of economic growth and development?

Answer 1

Neoclassical Solow Growth Model

Since you're interested, I can derive for you.

Assumptions:

a) Constant savings rate = s

b) Constant depreciation rate for all capital stock = d

c) Labour growth = n

d) Technological progress = g

e) Production function follows constant return to scale, but diminishing marginal return to factor

First of all, we know that in a production function,

Y = f(K,L)

Where, Y = output, K = capital stock, L = labour

Hence,

Y/L = f(K/L, L/L)

       = f(K/L, 1)

       = f(K/L)

Let Y/L = y, K/L = k

hence,

y = f(k)

Δy = f(Δk)

In maths,

Δk/k = ΔK/K - ΔL/L since k = K/L ---------- (1)

ΔK = Net Investment = S - D

Where S = savings, D = depreciation

Given S = sY, D = dK,

Hence ΔK = sY - dK

Given in assumption, ΔL/L = n,

Substitute back into (1)

Δk/k = (sY - dK)/K - n

Δk/k = sY/K - d - n

Δk/k = (sY/K)(L/L) - d - n

Δk/k = sy/k - d - n

hence Δk = sy - k(d+n)

Given y = f(k),

Hence,

Δk = s.f(k) - k(d + n) < ------------- Solow Growth Model

Depict it graphically, see diagram A in http://pianoism.blogspot.com/,

where y*, k* and s* are output per worker, capital per worker and savings per worker at steady state.

Steady state is defined as Δk = 0

Implying

0 = s.f(k) - k(d + n)

s.f(k) = k(n+d)