neoclassical growth model essay

Macroeconomics Essay: “Countries grow at different rates because they accumulate capital at different rates.” Is this true? The Neoclassical growth model is a framework which we can use to attempt to explain how economic growth behaves. It much simplified model which attempts to explain long run economic growth by looking at capital accumulation, population growth and increases in technical progress. We will use the neoclassical model to explain how countries grow, by using the fundamental equation kdot= sf (k) – (n+g+d) k, where k dot is the differential of k with respect to t. The equation shows us how for countries not in the steady state how capital accumulation affects growth and that eventually all countries converge to the steady state. Then once a country has reached its steady state it will be shown that capital accumulation no longer affects economic growth.

Looking at the fundamental equation of the neoclassical growth model kdot= sf (k) – (n+g+d) k. It is from this equation that we can see if a country invests more than the break even investment, then kdot increases, i.e. they accumulate capital, and if a country invests less than the break even investment then kdot decreases. The equations shows that all countries will converge to a steady state when investment per effective worker is equal to the break even investment. Where the steady state is when sf (k) = (n+g+d) k, at is shown on the diagram when capital per effective worker is equal to k*

By looking at the diagram above we can see that the distance between the two curves is represented by kdot. We use this diagram to express the fundamental equation. It shows that when the capital per effective worker is to the left of k*, it must increase k as the investment is greater than the amount of investment needed at the break-even point, and therefore they accumulate capital. If capital per effective worker is too the right of k* then the investment per effective worker is not enough and