This paper discusses economic growth models, especially the Solow-Swan model and the New Growth Theory models.

This paper explains that the neoclassical growth model, also known as the Solow-Swan model, was considered the basis of any research on economic growth; however, the neoclassical model treated technological progress as an exogenous factor to the model, and this led to some puzzles that it could not answer. The author points out that the endogenous model that appeared in the 1980s stressed the importance of immaterial resources that had an impact on economic growth, resources such as human capital and R&D that improved technological progress and increased economic growth; the subsequent models that followed were included in the New Growth Theory trend and endogenized economic growth. The paper examines three cases of fiscal policy using government spending as growth determinants: increased government expenditures without raising taxes, tax reduction without reducing government expenditure, and increased government expenditure with constant taxes. Economic notation used.

Table of Contents

The Solow-Swan Neoclassical Growth Model

The New Growth Theory and Endogenous Models

Fiscal Policy and Government Spending as Growth Determinants

Literature Review

Table of Contents

The Solow-Swan Neoclassical Growth Model

The New Growth Theory and Endogenous Models

Fiscal Policy and Government Spending as Growth Determinants

Literature Review

“We should take a closer look at these statements starting from the Cobb-Douglas production function Y = AKaL1-a. The idea is to endogenize the exogenous factor A. In order to do so, let’s first write a Cobb-Douglas production function for each individual firm:

Yi = Ai Ki aLi 1-a. Concerned with the factor Ai, Arrows argued that this is represents knowledge and learning accumulated in the society throughout time with collective investments and is a common and free good to all firms. How is it accumulated? Arrow relates this accumulation to the aggregate capital in an economy by the function Ai = Gz,

where G signifies the capital accumulation, which will be used in a proportion equal to z by the firm. Following in the Cobb-Douglas individual production function, Yi = Gz Ki aLi 1-a. Note that in this equation, K, L and Y are individual firm-related, while G is economy wide, as we have agreed above. If we consider that at an aggregate level, G = K, then our equation becomes Y = K a+z L 1-a.”

Yi = Ai Ki aLi 1-a. Concerned with the factor Ai, Arrows argued that this is represents knowledge and learning accumulated in the society throughout time with collective investments and is a common and free good to all firms. How is it accumulated? Arrow relates this accumulation to the aggregate capital in an economy by the function Ai = Gz,

where G signifies the capital accumulation, which will be used in a proportion equal to z by the firm. Following in the Cobb-Douglas individual production function, Yi = Gz Ki aLi 1-a. Note that in this equation, K, L and Y are individual firm-related, while G is economy wide, as we have agreed above. If we consider that at an aggregate level, G = K, then our equation becomes Y = K a+z L 1-a.”