Classical Growth Theory

• The high growth in the economy will result in a higher population.
• The higher population will eventually result in decreased returns to labor and deccreased labor productivity.
• No permant increase in labor producitivity will result and per capita GDP will settle at a subsistence level.
• A one-time increase in technology shifts the productivity curve upward, so at each and every point a high level of real GDP per hour is created.
• A one-time shift to the productivity curve will result increase wage rates one time and thus act to increase the labor force.
• With capital and technology held constant, a growing population translates into a greater number of labor hours, which reduce capital per hour of labor and forces the movement along the new productivity curve until the previous level of subsistence real GDP or wage level is achieved.

Real wage rate or Labor productivity = Real GDP / Hours labor