Neoclassical Growth Theory

DEFINITION of 'Neoclassical Growth Theory'

An economic theory that outlines how a steady economic growth rate will be accomplished with the proper amounts of the three driving forces: labor, capital and technology. The theory states that by varying the amounts of labor and capital in the production function, an equilibrium state can be accomplished. When a new technology becomes available, the labor and capital need to be adjusted to maintain growth equilibrium.

BREAKING DOWN 'Neoclassical Growth Theory'

This theory emphasizes that technology change has a major influence on economic growth, and that technological advances happen by chance. The theory argues that econonomic growth will not continue unless there continues to be advances in technology.

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RELATED FAQS
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    Neoclassical growth theory predicts real gross domestic product (GDP) through measures of total factor productivity, capital, ... Read Full Answer >>
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