Please help me understand the neoclassical growth theory?

Question

My textbook says it is "the proposition that real GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labor grow."

I don't understand the "savings and investment" component of it. Who's savings are we talking about? How can savings impact technological growth (am I even on the right track)?

Other than jargon, this textbook has proved to be little help. Please help me rationalize this concept. I'm so confused and have an upcoming midterm. Thanks!!

Answer 1

According to Solow model (neoclassical growth model):

Savings refer to both private savings and public savings.

Solow model presumes technological growth as an ecogenous variable, so it will not be affected by saving rate.

Before economy reaches its steady-state, high saving rate (as well as technological growth) leads to high growth rate:
a)High savings rate=>more investment=>higher capital per worker=>higher prodution per work=>economy grows
b)Technological growth =>higher prodution per work(therefore higher capital per work)=> economy grows

But as long as economy reaches its steady-state, economic growth only depends on the technological growth rate.

Answer 2

The basic idea of neo-classical theory is that in the long-run, aggregate supply is vertical because of wage adjustments and hence shifts in AD do not generate growth. Therefore, the only way to attain growth is by implementing supply side policies. Now, higher savings today, means higher investment tommorow. Investment is usually spent on Research & Development like new mothods of production or the imposition of training schemes for the workers. These investments affect the production costs of a firm and hence of the whole economy. Thus, investment except AD will also shift the AS curve to the right leading to growth at lower prices.

In this case we are talking about the firms' savings; their reserves they have gathered from previous profits.

Once again, higher corporate savings... higher investment on R&D....lower production costs....GROWTH

Answer 3

If new technology is invented , for example computers, it can not increase growth unless the technology is put into use, that is companies buy computers. When a company retains part of their profit to purchase the computers , instead of distributing it to stock holders they are saving and investing. If they borrow money or sell additional stock to get the money for the purchase, they are still investing, but the money has been saved by households which have not consumed all of their income, that is saved.
The increase in profits that the computers generate will in turn, increase the return on investment so companies will be motivated to increase the amount they invest.

Answer 4

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