Q = AF(K,L,R)
Where Q = output, K = productive services of capital, L =
labor inputs, R = natural-resource inputs, A represents
the level of technology in the economy and F is the
production function.
Clothing production
Clothing production
400
L=4
200
L=2
100
200
300
L=4
200
L=2
100125
Food Production
Economic Growth with Capital Accumulation: The Neoclassical Growth Model Pioneered by Robert Solow, this model serves as the basic tool for
understanding the growth process in advanced countries and has been applied
in empirical studies of the sources of economic growth. It describes an economy
in which a single homogeneous output is produced by two types of inputs capital and labor. In contrast to the Malthusian analysis, labor growth is
assumed to be a given. It is also assumed that the economy is competitive and
always operates at full employment, technology remains constant and that
there is a single kind of capital good (K). Measuring, then, the aggregate stock
of capital as the total quantity of capital goods means approximating the
universal capital good as the total dollar value of capital goods (i.e., the
constant-dollar value of equipment, structures, and inventories). If L is the
number of workers, then (K/L) is equal to the quantity of capital per worker, or
the capital-labor ratio. The aggregate production function for the neoclassical
growth model without technological change could be written as Q = F(K,L).It is
important to consider the need for capital deepening in the economic growth
process - a process by which the quantity of capital per worker increases over
time. The wage rate tends to rise as capital deepening occurs because each
worker has more capital to work with and the marginal product therefore rises.
As a result, the competitive wage rate rises along with the marginal product of
labor.Capital deepening occurs when the stock of capital grows more rapidly
than the labor force. In the absence of technological change, capital deepening
will produce a growth of output per worker, of the marginal product of labor, and
of real wages; it will also lead to diminishing returns on capital and therefore to
a decline in the rate of return on capital.
Q/L
(Q/L)1
(Q/L)0
.
.
.
.
.
V
E```
E` E``
(K/L)0
(K/L)1
APF
(Q/L)2000
(Q/L)1950
APF2000
E2000
APF1950
E1950
(K/L)1950 (K/L)2000
Capital per worker
K/L
Technological
Advance
Shifts Up the Production
Function
As a result of improvements
in
technology,
the
aggregate
production
function shifts upward over
time. Hence improvements
in technology combine with
capital deepening to raise
output per worker and real
wages.