Question

a) What are the two key approaches used in the new economic growth theories to explain why their theories are different from the established Neoclassical Growth theory.

b) Explain the fundamental determinants of long-term economic growth for an economy.

Answer 1

a)The new growth theory assumes that the desire and unlimited want of the people is an important force that brings productivity and economic growth.It states that real gross domestic product per person will show an increasing trend because of people's quest  for profit.

The theory shows the importance of entrepreneurship, knowledge, innovation and technology that brings economic growth and rejects the view that economic growth is the result of external forces.It regards knowledge as an asset of economic growth.

Neo classical growth theory atates the importance of three factors labor , capital and technology in economic growth.It asserts that economic growth cannot continue without technological advances.

b)Sustained increase in the quantity of goods and services that an economy produces is long run growthLong run growth is measured in percentage change in GDP.The determinanants of long term economic growth for an economy are growth of productivity,labor force participation and demographic changes.With increase in productivity the cost of goods become less and thus prices become low. Low prices increase the demand for goods and thus revenue increases.Demographic factors influence economic growth by bringing a change to  the employment ,population ratio.Labor force participation refers to the number of workers that is available.Labor force participation is high in countries where there is industrialization and high development.,