Neoclassical Growth Theory

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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
  1. How does the neoclassical growth theory predict real GDP?

    Neoclassical growth theory predicts real gross domestic product (GDP) through measures of total factor productivity, capital, ... Read Full Answer >>
  2. According to the neoclassical growth theory, what factors influence the growth of ...

    The neoclassical growth theory builds five major variables into its time-sensitive production formula. The first is total ... Read Full Answer >>
  3. How can the federal reserve increase aggregate demand?

    The Federal Reserve can increase aggregate demand in indirect ways by lowering interest rates. Aggregate demand is a measure ... Read Full Answer >>
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    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
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    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
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