Economic theory

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Hi folks,
Lets talk a bit about economic theory, the 3 main theories ares:
Classical : limited resources, we will all be living in huts and farming wild berries in about 500 hundred years.
Neoclassical: Economy grow with technology but will eventually slow as we will reach optimal technology level as a civilization. There will be no more incentive to innovate.
New Growth Theory: There will always be breakthrough and innovation to make our lives better and population will keep increasing (a very utopic idea in my humble opinion).
Now there is a theory that refers to choice, not sure if its Neoclassical or New Growth. I also remember seeing hybrid or other economic theory somewhere cant remember the name of it… Need someone to add to this post…
Cheers
 
1. “All countries per capita GDP will converge”.
2. “Technology innovation improves productivity of labor”.
3. “Why the rich gets richer and the poor gets poorer”.
4. “Competition reduces economic profit to zero”.
5. “Labor growth not related to population growth”.
6. “Standard of living rises because of technological improvements”.
Match to the right theory, and you’ll pass most of econ.
 
3. “Why the rich gets richer and the poor gets poorer”.
I dont find this familiar at all. Which theory is it?
 
maxmeomeo wrote:
3. “Why the rich gets richer and the poor gets poorer”.
I dont find this familiar at all. Which theory is it?
Click to expand...
Take a stab at the other ones then we’ll see.
 
“Match to the right theory, and you’ll pass most of econ”… That is a strong statement, dont forget FX arbitrage, currencies, purchase parity and interest parity.

Classical :
Labor growth associated with increased GDP and standard of living.
Technology innovation improves productivity of labor

Neoclassical:
Competition reduces economic profit to zero
Standard of living rises because of technological improvements ( one third rule) can also apply to New Growth
All countries per capita GDP will converge (no more incentive to innovate)

New Growth Theory:
Technology innovation improves productivity of labor (can also apply to Neoclass)
Labor growth not related to population growth
 
growth independent to population also apply to neoclassical theory, is that right?
 
This was tougher than I thought.
1. “All countries per capita GDP will converge.” - Neoclassical; Capital is free to roam and will seek high interest rates so all countries’ growth rates/ income should converge.
2. “Technology innovation improves productivity of labor.” - All; Not 100% sure about this one, but in general technology advancement is one of the two sources that increases labor productivity. Other is change in employment equilibrium.
3. “Why the rich gets richer and the poor gets poorer.” - Neoclassical; Not 100% about this one either, but seems to fit the bill. The target rate of return is the key here I think. Real interest has to be larger than the target rate of return for capital per labor hour to keep growing, and the rich would have a lower target rate of return given their accumulated wealth. It wouldn’t be Classical, because everyone is subject to going back to wage subsistence level. It wouldn’t be the New Growth Theory, since knowledge is public good and discoveries are made by luck (pace is determined by incentives and # of people looking).
4. “Competition reduces economic profit to zero.” - New Growth Theory; Discoveries bring profit, competition destroys. This, however, serves as incentive to innovate and both prosperity and growth persist.
5. “Labor growth not related to population growth.” - Neoclassical only; I would have put both neo and new here, but population growth is actually positively related to real GDP growth for new growth theory, since population growth and peoples’ insatiable wants are viewed as a source of growth.
6. “Standard of living rises because of technological improvements.” - both Neo and New; Under neo, standard of living rises but growth doesn’t continue. Under new, both persist.
 
Mostly correct…these are from my notes which were based on Stalla. I’m not reviewing Econ just yet, so I can’t elaborate more. Comments =====>
skwak88 wrote:
This was tougher than I thought.
1. “All countries per capita GDP will converge.” - Neoclassical; Capital is free to roam and will seek high interest rates so all countries’ growth rates/ income should converge.
=====> Correct.
2. “Technology innovation improves productivity of labor.” - All; Not 100% sure about this one, but in general technology advancement is one of the two sources that increases labor productivity. Other is change in employment equilibrium.
=====> Correct.
3. “Why the rich gets richer and the poor gets poorer.” - Neoclassical; Not 100% about this one either, but seems to fit the bill. The target rate of return is the key here I think. Real interest has to be larger than the target rate of return for capital per labor hour to keep growing, and the rich would have a lower target rate of return given their accumulated wealth. It wouldn’t be Classical, because everyone is subject to going back to wage subsistence level. It wouldn’t be the New Growth Theory, since knowledge is public good and discoveries are made by luck (pace is determined by incentives and # of people looking).
=====> They associated this with New Growth Theory only!
4. “Competition reduces economic profit to zero.” - New Growth Theory; Discoveries bring profit, competition destroys. This, however, serves as incentive to innovate and both prosperity and growth persist.
=====> Correct.
5. “Labor growth not related to population growth.” - Neoclassical only; I would have put both neo and new here, but population growth is actually positively related to real GDP growth for new growth theory, since population growth and peoples’ insatiable wants are viewed as a source of growth.
=====> Yep.
6. “Standard of living rises because of technological improvements.” - both Neo and New; Under neo, standard of living rises but growth doesn’t continue. Under new, both persist.
=====> Neo yes, but not mentioned directly under New.
Click to expand...
 
Thanks, Dreary. This was a good review. I’ll be curious to find out why #3 is New Growth only. Kindly post if you find out.
 
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