| Economic growth theory | Classical | Neoclassical | New Growth(*3) |
| population growth | Positive effect | No effect | |
| increasing the productivity of labor | No effect (*4) | ||
| increasing the rate of savings and investment | No effect (*4) | ||
| return to capital | ↓(after a period of growth) | ||
| real interest rate | ↓(after a period of growth) | ||
| per capita GDP will settle at a subsistence level? | Yes(*1) | Yes | No |
| continued growth (NOT level) in dividends | Yes(*2) | ||
| convergence with richer countries due to acess to the same world class technology and capital markets as its more advanced neighbors? | Unlikely (*5) | ||
| Equilibrium | Target rate of return (*6) = Real interest rates (*7) | ||
| Technological change (advances) | Increase
| Sustainable economic growth Higher dividend levels & Long-term dividend growth rates (through increased savings) |
Anything that increases real GDP per hour of labor above subsistence level causes population growth that overwhelms the gains from increased productivity due to a greater level of capital.
(*2) because technological advances will be shared by many sectors of economy
(*3) AKA Endogenous Theory.
(*4) Neither condition would allow the country to increase the long-term level of real wages. Under the classical theory of economic growth, an economy would have a temporary improvement in the labor living standards as the real wage rate climbed above the subsistence wage rate, but over time population growth would lower capital per hour of labor and drive real GDP per hour of labor back towards the subsistence wage level.
(*5) Due to difference in savings rates and target rates of return.
The neoclassical growth theory model does imply that given access to the same technology and capital markets, then growth rates and income levels per person should begin to converge on a global basis. While some convergence has occured over time, many countries are just as far away from the rich countries as they have ever been. This lack of convergence in the real world is probably due to the fact that the neoclassical growth model leaves out many of the variables that must grow at the same rate in difference countries for convergence to occur. Obstacles to convergence include differences in population growth rates, in rates of technological change, and most importantly, in savings rates and target rates of return. In essence, if the countries do not have similar economic and demographic characteristics, then it would be difficult for them to grow at the same rate.
(*6) achieved in the market
(*7) rates of return the investor wishes to earn
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