NEOCLASSICAL THEORY OF ECONOMIC GROWTH
–contributed by: Stanley Jevons, Vilfredo Pareto, Leon Walras and
Francis Edgeworth
Using 4 Sources of growth:
-Labor (L)
– Physical Capital (K )
– Human Capital (H )
– Technology (T )
We can map the function as: GDP = FT(L, K, H)
Keep in mind we must follow 2 strong assumptions:
1) Diminishing marginal returns
2) Constant return to scale
Growth in labor ( L)
-Increasing L causes GDP to increase
– due to diminishing marginal returns, the increase in GDP is less
than the increase in L
– end result is lower living standards because per capita GDP falls
Growth in Physical Capital (K)
