Question

explain the 3 theories of economic growth with examples ?

Answer 1

Principle theories of economic growth are Classical theory, Neo classical theory and Keynesian demand side theory.Classical theory was developed by Adam Smith in Wealth of Nations.There were several factors which increased economic growth . He argued that the market's role in determining demand and supply,role of trade which enables more specialisation,productivity of labor ie skill, competance , judgement with which labour is applied in a nation helps in determining the per capita income,increasing returns to scale ie specialization in industry leads to increase in production and increasing returns to scale, are the factors leading to growth.Economists developed the idea of subsistence level in this theory.Ricardo and Malthus developed the Classical model and assumed technological change to be constant.Eg different classes used in their wages in different ways, workers for subsistence , landlords for luxury,etc and industries would invest profit again in new venture.This is an example of subsistence level.

The Neo classical model of Solow/Swan-This theory suggests that increase in capital or labor leads to diminishing returns.To increase the rate of economic growth an increase in proportion of GDP that is invested is needed. However higher investment leads to diminishing returns and limits growth.  Technological progress is also needed for growth.Example Profit maximization of the firm lies behind this theory.

Keynesian demand side theory-Keynes was of the view that in the short and medium term aggregate demand plays an important role in increasing growth.Recessions would lower long term growth.Keynesians believe that consumers demand is the most important force in the economy.So government should increase demand to bring growth in the economy. Thus Keynesian theory is in support of expansionary fiscal policy.Keynes was of the opinion that increased government expenditure and lower taxes will increase demand and stimulate growth.Eg Keynes developed his theory in response to the great depression.