Neo-Classical Growth Models

Abstract

The general line of development is clear from the basic neo-classical model examined in 11.7 above. The essential feature is the assumption of a smooth production function, ensuring a continuous range of possible values of the output-capital ratio (1/v). Steady-state growth is consistent with the model in the sense that, once the ‘right’ output-capital ratio obtains, then it remains constant on the steady-state equilibrium path. The ‘right’ output-capital ratio is that specified by the familiar Harrod-Domar condition: 1/v = n/s. The constancy of this ratio implies that the warranted growth rate (s/v) equals the given growth rate (n) of the labour force.