SS 313 COMPARATIVE ECONOMIC PLANNING

I. SOLOW NEOCLASSICAL
GROWTH MODEL
BARTOLOME, SIMON
TAGULAO, SUSANNE

II. NEW GROWTH MODEL

GACELAN, KIMBERLY
SAPIGAO, CINDY

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I. SOLOW NEOCLASSICAL
GROWTH MODEL
BARTOLOME, SIMON
TAGULAO, SUSANNE
 WORLD WAR II
Germany and Japan

before after

heavy losses growing quickly

China US, Canada, France
WORLD WAR II
7-10% per year Germany and2%Japan
per year
the standard of living is doubling doubling only once every 35 years
every 7-10 years
 HIGHER STANDARDS OF LIVING
good institutions

property rights honest government poltical stability dependable legal

system

competitive and
open markets
SOLOW NEOCLASSICAL GROWTH MODEL
WHO IS ROBERT SOLOW?

an American economist who was warded the 1987

Nobel Prize in Economic Sciences for his important
contributions to theories of economic growth
Solow Model

Catching Up Growth

Cutting Edge Growth

SUPER SIMPLE SOLOW MODEL
Production of Function= GDP

labor (human physical

ideas
capital) capital
PHYSICAL CAPITAL and
DIMINISHING RETURNS
OUTPUT= F (A, K, L)
-output (Y) is a function of
the quantity of capital
Therefore, the production function of neoclassical growth
theory is used to measure the growth and equilibrium of an
economy.

Positive relationship
-as Capital (K) goes up,
Output (Y) goes up
DIMINISHING RATE

the first capital gets the

most productive
DIMINISHING RATE Iron Logic of Diminishing Returns

the first capital gets the

most productive
 DIMINISHING RETURNS
The subsequent increase in capital allocation, there
wil be less and less productive task output.

To represent both of these properties, we can use a

simple production function:
SQUARE ROOT FUNCTION

The marginal product of capital

describes how much additional output
is produced with each additional unit of
capital
_
 CAPITAL RUST
=
CAPITAL DEPRECIATION
Starting at the initial level of capital, K1,
depreciation now exceeds investment.
This means the capital stock starts to
decline, and continues until capital falls to
its new equilibrium level of K2. The
increase in the depreciation rate leads to
a decline in the capital stock and in the
level of output.
WHERE DOES THE MONEY FOR
CAPITAL ACCUMULATION
COME FROM?
 Saving and Investment
-A key component of economic growth is
saving and investment.

-An increase in saving and investment

raises the capital stock and thus raises
the full-employment national income and
product.

-The national income and product rises,

and the rate of growth of national income
and product increases
 SAVING / INVESTMENT
When we create economic output, we can consume OUTPUT, or we
can save it. This saved output can then be re-invested as physical
capital, which grows the total capital stock of the economy.

mimic the shape of the output line

since investment is just a constant
fraction of output.
-All investment goes to
repair and replace existing
capital
-no new capital
-if capital isn’t growing,
nothing is growing
 Either way, it all goes
back to reach steady
state level

--------------------------
CAPITAL STOCKS
GROWS
 STEADY STATE
The steady-state is the key to understanding the Solow
Model. At the steady-state, an investment is equal to
depreciation. That means that all of investment is
being used just to repair and replace the existing
capital stock. No new capital is being created.

-Steady state: a capital stock k ∗ where, when

reached, k˙ = 0

-Solow model: if all countries are in their steady states,

then:
1. Rich countries have higher saving (investment) rates
than poor countries
2. Rich countries have lower population growth rates
than poor countries

-In Solow model (and others), the equilibrium growth

path is a steady state in which “level variables” such as
K and Y grow at constant rates and the ratios among
key variables are stable.
HUMAN CAPITAL
human capital is subject to
diminishing returns
IDEAS
More ideas = more output from the same
inputs of capital and labor

-combination of ideas sparked a dramatic

increase in productivity that transformed the
world
(inventions, industries, etc)

-Better ideas lead to growth in ways:

>increased productivity of a given capital
stock and
> the increased investment, which increases
capital accumulation.
I. NEW GROWTH MODEL
GACELAN, KIMBERLY
SAPIGAO, CINDY
 New Growth Theory
The Solow model emphasizes how
technology advancement and capital
accumulation fuel economic expansion
(Govindrao, 2018).

ROBERT SOLOW
Robert Solow, the economist, first proposed
the New Growth Theory in the 1950s.
Shinde, Ramesh, and Govindrao. “Application of Differential Equation in Economical
Solow Growth Model.” International Journal of Mathematical Archive, vol. 9, no. 4, 2018, pp.
84–90, deogiricollege.org/wp-
content/uploads/2021/research/books/2018/Kiwane_2018_application_of_differential_
equation_in_solow_growth_model.pdf. Accessed 22 Nov. 2023.
 HISTORY

Solow’s
Model

Expanding knowledge reservoir: Technology.

 New Growth Theory
The Romer model highlights the significance
of information and human capital in
encouraging growth, with a particular
emphasis on the function of innovation and
technological progress (Sanchez-Robles,
2004).

PAUL ROMER
American Economist who believes that
information may be a catalyst for sustained
growth in the economy.

Sanchez-Robles, Blanca. “Solow to Romer: Policy Shocks and

Growth.” SSRN Electronic Journal, 2004,
https://doi.org/10.2139/ssrn.564182. Accessed 4 Apr. 2019.
 New Growth Theory
ESSENTIAL FACTORS

HUMAN CAPITAL
INFORMATION TECHNOLOGY
NEW KNOWLEDGE
Sengupta, J. (1998). New growth theory : An applied perspective.
Semantic Scholar.
https://semanticscholar.org/paper/fe72e377b44ba150fa790db4c
b0e533148b78d54
TWO FACTORS

Technological progress as a
product of economic activity.

Knowledge and technology are

characterized by increasing
returns.
 HISTORY

Harrod Neoclassical Endogenous

Domar Growth Growth
Model Theory Theory
Harrod
Domar
Model
 HISTORY

Harrod Neoclassical Endogenous

Domar Growth Growth
Model Theory Theory
 Key Components of
New Growth Theory

Human capital Technological Increasing Returns

Research and
and education progress and to Scale
development
innovation
 Key Components of New Growth Theory

HUMAN CAPITAL AND EDUCATION

Investments in education and human capital
development enhance a nation's ability to innovate
and adapt to changing economic conditions. A
skilled workforce fosters productivity, attracts
foreign investment, and drives economic growth.

TECHNOLOGICAL PROGRESS AND INNOVATION

are catalysts for economic growth. Examples
include advancements in information technology,
biotechnology, and renewable energy. These
innovations lead to increased productivity,
efficiency, and the creation of new industries and
job opportunities.
 Key Components of New Growth Theory
RESEARCH AND DEVELOPMENT
Research and development (R&D) activities play a
pivotal role in stimulating innovation and economic
growth. Governments, businesses, and academic
institutions invest in R&D to create new technologies,
products, and processes.

O INCREASING RETURNS TO SCALE

In the context of New Growth Theory, this concept
highlights the idea that as more resources are devoted
to research and development or innovation, the overall
productivity and economic output can grow
disproportionately.
Implications for Economic
Development

Increased productivity and output

Higher living standards

Reduced poverty and inequality

Sustainable economic growth

 Implications for Economic Development
INCREASES IN PRODUCTIVITY
In the context of New Growth Theory, investments in human capital,
innovation, and technology lead to increased productivity, allowing
for greater output and economic efficiency.

HIGHER LIVING STANDARDS

The implementation of New Growth Theory components leads to
improvements in living standards.

REDUCED POVERTY AND INEQUALITY

New Growth Theory has the potential to reduce poverty and
inequality. When economies grow sustainably, it creates
opportunities for wealth distribution, poverty reduction, and
narrowing income gaps.

SUSTAINABLE ECONOMIC GROWTH

New Growth Theory emphasizes sustainable economic growth,
which ensures that resources are utilized efficiently and
environmental concerns are addressed.
 Implications for Economic Development

INCREASES IN PRODUCTIVITY
In the context of New Growth Theory, investments in
human capital, innovation, and technology lead to
increased productivity, allowing for greater output
and economic efficiency.
HIGHER LIVING STANDARDS
The implementation of New Growth Theory
components leads to improvements in living
standards.

REDUCED POVERTY AND INEQUALITY

New Growth Theory has the potential to reduce
poverty and inequality. When economies grow
sustainably, it creates opportunities for wealth
distribution, poverty reduction, and narrowing
income gaps.
 Investment in research and
development
Enhancing education and skills
development
Promoting entrepreneurship and
innovation
Creating an enabling business
environment
 Role of Institutions

Importance
Property Access to Government
of strong transparency
rights finance
legal and and
regulatory protection and credit accountability
frameworks

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 SS 313 COMPARATIVE ECONOMICS

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