Schweser Book2 P19 1. it states that real GDP per labor hour grows indefinitely. Why? I think since the the economy is described as perperual motion economy, the GDP per labor hour will always increase. 2. why the theory predicts that economic growth will equal growth in capital per labor hour? thx
1 - “GDP per labor hour grows indefinitely.” that means the GDP per labor hour will always increase, like you said
- New Growth Theory is also known as Endogenous Growth Model - The new growth theory think tank propose that the contribution of knowledge - unlike the contribution of Labor(with fixed equipment) - is not subject to law of diminishing returns. In other words - the ROI in R&D donot accrue solely to the firm - the society in general also benefits (other firms can imitate). Hence the growth is self-sustaining/endogenous. 2) I did’nt understand the 2nd part. Someone correct me if I am wrong here - All the three theories predict that the economic growth will equal growth in capital/lab hr. Unlike the classical growth theory, the New growth theory (and Neoclassical growth theory) contend that the economic growth is subject to advances in Technology (they do not include the growth in capital invested/effect of population growth in the equation).
From what I understand, thinking in terms of endo/exogenous will serve you best. Neoclassical and classical are exogenous–meaning growth is a function of external variables like technology increases or limited resources. New growth is more endogenous. Growth depends on innovation, which is potentially limitless assuming free flow of information. All three include population growth effects, but only new growth doesn’t view that as a growth capper (opportunity cost of having kids controls population).