Growth Economics Models, Essay Example

Neoclassical Growth Model

This economic growth model builds on the Harrod-Domar model by including labor as a factor of production. This is one of the main advantages of this model. Other advantages also include having the capital-labor ratios variable (Aghion, Howitt, & Bursztyn, 2009). This improved on the fixed ratios that were employed in the neoclassical model. This model also is able to overcome the labor irrelevant shortfall that is characteristic of the AK Model. This is also the inherent difference between the neoclassical model and the AK Model. The major advantage of this model is the fact that it takes into consideration the aspect of diminishing law of returns on capital.

The AK Model

The AK model was an improvement on the neoclassical difference. This model had one evident difference from the AK model. This model generally ignored the aspect of diminishing returns on capital. This model assumes a linear function where output is a function of capital (Aghion, Howitt, & Bursztyn, 2009). The main advantage of this theory is the fact that long-run is determined by endogenous factors as opposed to exogenous factors defined by the neoclassical model.

Product-Variety Model

This model postulates that research and development leads to the creation of a variety of inputs and/or intermediate products. This leads to the division of labor which in turn leads to increased productivity. The most evident advantage of this model is the fact that it takes into consideration research and development as well as the division of labor as the core triggers of growth within the economy.

Schumpeterian Model

Similar to the product-variety model, this model by Schumpeter focusses on four main factors;

• The production process
• Dynamic examination of the economy
• Growth trend
• The fall of capitalism(Aghion, Howitt, & Bursztyn, 2009)

Schumpeter believed that continual improvement of existing goods and the creation of new goods and services leads to growth. The main advantage of this model is its acknowledgement of the entrepreneur as a factor of production who is responsible for innovation. This model critically relied on technological and technical factors as opposed to the neoclassical and AK models.

References

Aghion, P., Howitt, P., & Bursztyn, L. (2009). The Economics of Growth. Cambridge, Massachussetts: MIT Press.