Question

What is the new growth theory? how does the new growth theory differ from the growth theory developed by Robert Solow?

Answer 1

New growth theory:

The new growth theory was developed by Paul Romer which states that economic incentives influence the technological changes and is determined by the working of the market system.

According to the new growth theory the firms engage in various research and development activities and thus contribute to the economy's stock of knowledge capital.The theory argues that innovations and technological developments do not occur randomly but they depend the various research and development activities undertaken.It also states that people have access over what to study and how to study thus they have a complete control over their knowledge capital.If they are able to gain enough profit incentives then they will work harder towards discovering new inventions and thus growing their human capital.This pursuit of profits will thus eventually lead to an increase in the real GDP per person.

This theory treats knowledge as an asset for growth which is not subjected to any finite restrictions or diminishing returns which is the case for other assets like capital or estate.It states that knowledge is an intangible resource which is not physical,and can be grown within the firm.

Under this theory the firms invest in human capital,create opportunities and make resources available within the firm,expecting that the individuals would come up with new innovations,new concepts and technologies which can be useful for the firm.

Difference between the New growth theory and the growth theory developed by Robert Solow.

The Solow growth theory lays emphasis on the technological change as well as the quantity of capital available to the workers,which determine the economic growth.

However according to the New growth theory accumulation of knowledge is the key factor which leads to economic development.