

Robert Solow argued that on average with no change in technology a 1 percent increase in capital per hour of 

labor brings a one-third of 1 percent increase in read GDP per hour of labor.



Growth accounting tells us that to achieve faster growth (i.e. productivity speedup) we must either increase 

the growth rate of capital per hour of labor or increase the pace of technological advance (which includes 
improving human capital).  The primary methods to achieve this are:

o

Stimulate saving— saving creates investment which brings about capital accumulation.  So 

stimulating saving can bring about economic growth.

o

Stimulate R&D— everyone benefits from the creation of basic research.

o

Target high technology industries— some argue that by using public funds to fund tech you can 

earn above average returns as others catch up.

o

Encourage international trade— trade extracts the gains from specialization and trade.  The fastest 
growing nations today are the ones with the fastest growing imports and exports.

o

Improve the quality of education



Productivity slowdown occurs when technology is used to deal with issues outside of increasing productivity.  

For example, energy shocks cause R&D dollars to be used for increasing fuel efficiency rather than improving 

productivity.

LOS e: Discuss the ways in which faster economic growth can be achieved by increasing the growth of physical 

capital, technological advance, and investment in human capital.

Saving and investment in new capital increase labor productivity by increasing the level of capital per worker.

Investment in human capital is the investment in people’s skills and knowledge, and is a key driver of economic 

growth. Both productivity improvements and technological advances derive from human capital.

The discovery of new technologies contributes to sustained economic growth by making human capital and physical 

capital more productive. Research and development is the primary driver of the discovery of new technologies. While 

the most widespread and powerful technologies represent developments in human capital, most technological progress 

involves improvements in the productivity of physical capital.

LOS F: Compare and contrast the classical growth theory, the neoclassical growth theory, and the new 

growth theory.



Classical growth theory is the view that real GDP growth is temporary and that when real GDP rises above a 

subsistence level, a population explosion eventually brings real GDP back to the subsistence level.



Classical economists often used the idea of a subsistence real wage rate which is the 

minimum real wage rate needed to maintain life.  In classical theory, if the real wage late rose 
above this level a population explosion ensued.  But eventually you had diminishing returns to 

labor so labor productivity fell.  Eventually wages fell back to the subsistence level.



In this theory, a growing population means that labor hours grow so capital per hour of labor falls.  As this 

occurs, there is a movement backwards on the productivity curve to the subsistence wage rate.