does an increase in labour productivity (ie TFP increase) result in a permanent increase in the economy’s growth rate under classical model? i know it does under neoclassical, and it definitely does in endogenous, but not sure about classical.
also, we have to assume that an increase in TFP can occur only through technological progress, right? but if there is tech progress under neoclassical model, then capital deepening occurs to bring the economy back to the steady state growth rate, so how does an increase in TFP result in a permanent increase in economic growth.
finally, what exactly is this economic growth? are we talking about growth in long term potential GDP here?
Classical models assume any growth is offset by an increase in population (from higher gdp/capita) which reverts the economy back to its subsistence level.
well i was kind of confused on what exactly was the growth that was being talked about. was it growth in long term potential GDP, LT per capita GDP? and at the end of the day, does anything lead to a permanent increase in this growth rate under the classical model?
They seem to bounce back and forth between total GDP and per capita GDP pretty freely.
Under the classical model, GDP per capita remains essentially constant, so the growth rate of total GDP would follow the growth rate of the population. Because technology growth is seen as driving population growth, an increase in the growth rate of technology will lead to an increase in the growth rate of total GDP.
So TFP leads to a permanent incrase in the growth rate of total GDP? I thought that growth in real GDP per capita was temporary, since a population explosion would occur, eventually driving GDP per capita back to subsistence.
I’m not fully clear on this. Can you explain this further. I have looked at your write-ups on this, and with classical growth, growth in real GDP is temporary. So I don’t see how GDP per capita is constant, since it will always return to subsistence?