There are four major groups of conclusions from the neoclassical model:

1. Capital Accumulation
a. Capital accumulation affects the level of output but not the growth rate in the
long run.
b. Regardless of its initial capital-to-labor ratio or initial level of productivity, a
growing economy will move to a point of steady-state growth.
c. In a steady state, the growth rate of output equals the rate of labor force growth
plus the rate of growth in TFP scaled by labor’s share of income [ n+θ /¿(1 −α
)]. The growth rate of output does not depend on the accumulation of capital or
the rate of business investment. Those familiar with the “labor-augmenting”
technical change formulation of the neoclassical model should note that in that
formulation, the rate of labor-augmenting technical change is also the growth
rate of labor productivity. In our formulation, the growth rate of labor pro-
ductivity is θ /¿ (1 −α ). So both formulations imply that long-run growth equals
the growth rate of the labor supply ( n ) plus a constant growth rate of labor pro-
ductivity.
2. Capital Deepening vs. Technology
a. Rapid growth that is above the steady-state rate of growth occurs when coun-
tries first begin to accumulate capital; but growth will slow as the process of
accumulation continues (see Exhibit 16).
b. Long-term sustainable growth cannot rely solely on capital deepening invest-
ment—that is, on increasing the stock of capital relative to labor. If the capital-
to-labor ratio grows too rapidly (i.e., faster than labor productivity), capital
becomes less productive, resulting in slower rather than faster growth.
c. More generally, increasing the supply of some input(s) too rapidly relative to
other inputs will lead to diminishing marginal returns and cannot be the basis
for sustainable growth.
d. In the absence of improvements in TFP, the growth of labor productivity and
per capita output would eventually slow.
e. Because of diminishing marginal returns to capital, the only way to sustain
growth in potential GDP per capita is through technological change or growth
in total factor productivity. This results in an upward shift in the production
function—the economy produces more goods and services for any given mix of
labor and capital inputs.
3. Convergence
a. Given the relative scarcity and hence high marginal productivity of capital and
potentially higher saving rates in developing countries, the growth rates of de-
veloping countries should exceed those of developed countries.
b. As a result, there should be a convergence of per capita incomes between de-
veloped and developing countries over time.
4. Effect of Savings on Growth
a. The initial impact of a higher saving rate is to temporarily raise the rate of
growth in the economy. Mathematically, this can be seen as follows: Equation 9
indicates that an increase in the saving rate ( s) reduces the steady-state output-
to-capital ratio (Ψ ). This makes the last term in Equations 10 and 11 positive,
 raising the growth rates of output per capita ( y ) and the capital-to-labor ratio (k
) above the steady-state rate. In response to the higher saving rate, growth ex-
ceeds the steady-state growth rate during a transition period. However, the eco-
nomy returns to the balanced growth path after the transition period.
b. During the transition period, the economy moves to a higher level of per capita
output and productivity.
c. Once an economy achieves steady-state growth, the growth rate does not de-
pend on the percentage of income saved or invested. Higher savings cannot
permanently raise the growth rate of output.
d. Countries with higher saving rates, however, will have a higher level of per
capita output, a higher capital-to-labor ratio, and a higher level of labor pro-
ductivity.