Neoclassical growth theory

I think this has been asked before, but I can’t find it. Under the neoclassical growth theory when technology changes it leads to an increase in savings and investment. This causes capital per labor hour to grow and the REAL RATE TO FALL. When the real rate falls to the target rate of return economic growth stops. Why does the real rate fall? Is this just the diminishing returns on capital?

Yea, as you move up the curve, the slope of the line tangent to the curve decreases due to increase in capital per labor hour.

diminishing return on capital

Okay that makes sense. That would also explain the New Growth theory too right? That is saying that as you move up the line and your real rate decreases (tangent line) that the incentive to find new technolgies goes up. Sound right?

mwvt, you are correct about new growth theory.

the new growth theory does not have a stopping mechanism - there is no diminishing return of technology.

Of knowledge.

SWEET! I love it when I understand it.

I thought the new growth does not really depend on the target return but on the competitive advantage of a new discovery and on the competition it creates

I read it as target rate is higher due to new discovery, competition comes in, erodes profits, provides incentives for new technologies.

vicious cycle

maratikus Wrote: ------------------------------------------------------- > vicious cycle Kids having kids…now THAT’S a vicious cycle!

is the new growth theory same as endogenous theory? I saw that on exam 3