Neoclassical Model Formula

[doobsmeister]

Guys,
The neoclassical model is confusing the hell out of me (page 641 of curriculum)
“In the steady state, the output-to-capital ratio is constant and the capital-to-labor ratio and output per worker grow at the same rate. On the steady state growth path, the marginal product of capital is also constant. The marginal product of capital is also equal to the real interest rate in the economy.
” Capital deepening is occuring, but has no effect on the growth rate of the economy or on the marginal produc of capital once the steady state is reached”
Can someone intuitively explain the neoclassical model?

 

[Quest]

There is nothing to confusing about the neoclassical model in my opinion and I find Schweser does a good job of summarising it. Basically, it says that once living standards improve (i.e. more compensation for each worker) population growth will occur dragging the growth rate of the economy back to its steady state.
The key is that any overproportional increases in growth will be ‘pulled’ back to steady state in the long term.
Note: there is no empirical evidence to back up this theory.

 

[S2000magician]

Quest wrote:There is nothing to confusing about the neoclassical model in my opinion and I find Schweser does a good job of summarising it. Basically, it says that once living standards improve (i.e. more compensation for each worker) population growth will occur dragging the growth rate of the economy back to its steady state.
The key is that any overproportional increases in growth will be ‘pulled’ back to steady state in the long term.
Note: there is no empirical evidence to back up this theory.

You’re discussing the classical growth model, not the neoclassical growth model.

 

[S2000magician]

doobsmeister wrote:Guys,
The neoclassical model is confusing the hell out of me (page 641 of curriculum)
“In the steady state, the output-to-capital ratio is constant and the capital-to-labor ratio and output per worker grow at the same rate. On the steady state growth path, the marginal product of capital is also constant. The marginal product of capital is also equal to the real interest rate in the economy.
” Capital deepening is occuring, but has no effect on the growth rate of the economy or on the marginal produc of capital once the steady state is reached”
Can someone intuitively explain the neoclassical model?

Perhaps the article I wrote on this will be of some help: http://financialexamhelp123.com/neoclassical-growth-theory/.