Theories of Growth

One theory of growth focuses on the forces affecting income disparity. This theory, originally formulated by Oded Galor, identifies prehistoric and historical forces that affect changes in income. In the past, income disparity has resulted from the interaction between population size and technological progress. Population growth lowered fertility rates and boosted per capita income in some economies. Population growth also increased the importance of education. Ultimately, growth in the world economy is a reflection of the level of human productivity, resulting in the rising number of working people.

Adam Smith’s theory

Adam Smith was a staunch advocate of free trade and laissez-faire policies in economic affairs. His theory of social division of labour suggests that the laws of nature are superior to state laws because manmade laws cannot be perfect and beneficial for society. This theory emphasizes that the social division of labour should lead to greater dexterity among workers and greater efficiency in producing commodities. It also focuses on the importance of innovation and the creation of better machinery and equipment.

According to the theory, the rate of investment determines growth. Adam Smith defined fixed and circulating capital. Fixed capital refers to the means of production. Investing in productive assets increases the rate of growth. When a market grows, investment increases and production increases. Growth in a market economy is dependent on the rate of investment. When investment increases, the cost of production goes down. In other words, more money flows into the economy.

Schumpeterian growth theory

The prevailing literature on the relationship between finance and economic growth has largely misinterpreted Schumpeter’s work. This literature portrays him as advocating a school of thought and paradigm that does not relate to real analysis. However, it is possible to find strong evidence of positive effects of financial system growth on GDP growth, particularly when accounting for the varying levels of private debt. In this article, we will explore the empirical evidence in support of Schumpeter’s theory.

According to Schumpeter, entrepreneurial innovations replace outdated technologies, generating new economic activity. Thus, he argues that statistical offices are mis-measuring productivity growth due to creative destruction. In the same vein, Aghion links declining productivity to the rise of super-star firms with high profits and low labor share. To illustrate this point, we will look at the economics of the United States, and discuss how a global economy should structure its policies to avoid this type of stagnation.

New growth theory

“New Growth Theory” is a reformulation of the traditional model of economic growth, highlighting the importance of knowledge, technology, entrepreneurship, and innovation. It is led by Stanford professor Paul Romer and emphasizes the importance of the third factor, innovation. It focuses on the need for economic growth and development to move beyond reliance on physical resources. For instance, the development of software may take place within a company, if that company follows the theory.

The new growth theory argues that economic growth in advanced economies stems less from capital acquisition than from innovation. The authors empirically illustrate the various phases of growth in technology-intensive sectors and offer a new approach to learning by doing. The authors also critically review the role of the foreign exchange market in international development and apply time-series econometric techniques to R&D investments in human capital within a global framework. Ultimately, the authors show that the new growth theory fails to account for the many factors that affect economic growth.

Demand-determined model of growth

The demand-determined model of growth was developed by J.S. Duesenberry. It assumes that demand for a particular product is growing at a steady rate, and that the spending habits of investors and consumers will respond to higher rates of growth. The demand-determined model is more accurate, however, when it comes to predicting the size of a country’s economy. While it can be tricky to apply in practice, it offers a useful framework to think about economic growth.

This model assumes that demand and supply are perfectly matched, thereby causing economic growth. In the case of a non-perfect market, demand is directly related to supply. This is true for the production of goods and services. Nonetheless, there is a limit to the amount of investment that can be done in a country. The G&S model excludes the effect of interest rates and GNP, and assumes that the government regulates both supply and demand.

Knowledge-based model of growth

The knowledge-based model of growth refers to the economic development process involving the application of knowledge-based technologies to solve problems. This model is supported by a knowledge-information computer system that helps disseminate and commercialize knowledge assets. Hence, the model provides value to researchers and helps to create a sustainable competitive advantage for the region. It can also be adopted by other organizations and become a powerful economic engine in the targeted region.

The core value of knowledge talents is to transfer tacit knowledge and develop personal creativity. The knowledge-based professionals’ intrinsic sensitivity to core value agreement is a key discovery in the knowledge capital development system. In the study, the authors examine the relationship between core value identity and tacit knowledge transfer. They employed structural equation modeling to analyze the relationship between core value identity and tacit knowledge transferring. After examining the theory, they derived a set of research questions that can be used to improve management practices in knowledge-based economies.