

Neoclassical growth theory posits that real GDP per person grows because technological changes induces a 

level of saving and investment that makes capital per hour of labor grow.  Therefore, growth ends only if 

technological change stops.



Regarding population growth, one of the key economic influences affecting population growth is 

the opportunity cost of a woman’s time.  Also, increases in GDP increase productivity and 
increased incomes advance health care which results in more labor hours per person.



In the neoclassical model the rate of technological change influences the economic growth rate 

but economic growth does not influence the pace of technological change.



One of the key outputs from the neoclassical model concerns savings rate.  It is assumed that 

all else equal higher real interest rates result in higher savings.  To decide how much to save 

people compare this rate with a required return.  If the required return is less than prevailing 

rates then saving and capital accumulation occur which results capital per hour of labor grow 
and vice versa.



According to neoclassical theories prosperity can persist because there isn’t necessarily a 

classical population growth to induce lower wages.  That said, growth will stop if technology 

advance don’t occur.



In this model the growth rate of the population is independent of economic growth (as we grow 

opportunity costs for women rise leading to a decline in the birth rate.  This is offset by 

increase in life expectancy.)



New growth theory asserts that real GDP per person grows because of the choices people make in the 

pursuit of profit and that growth can persist indefinitely (Paul Samuelson developed this theory)



This theory beings with two facts about market economics:



Discoveries result from choices



Discoveries bring profit and competition destroys profit



It argues that:



Discoveries are a public good— knowledge has no opportunity costs.



Knowledge is capital that is not subject to diminishing returns— this is the central point 

of new growth theory.  Because of this there is no growth stopping mechanism in this 

theory.



In this theory growth rates depend on the real interest rates and the incentive to innovate



The new growth theory implies that although the productivity curve shows diminishing returns, 

if capital is interpreted more broadly as physical capital, human capital and the technologies 
that they embody, then real GDP per hour of labor grows at the same rate as the growth in 

capital per hour of labor.