## Table of contents:

- Introduction
- Keynesianism
- Neo-Keynesianism
- Specific Neo-Keynesianism
- Neoclassical movement
- Harrod-Domar model
- Multi-factor economic growth model
- Solow Growth Model
- The golden rule of accumulation
- Display models
- Conclusion

2023 **Author**: Henry Conors | [email protected]. Last modified: 2023-11-26 12:05

If every moment of interest was tested in practice, this would significantly slow down the development of science and make us less efficient. To prevent such a scenario, simulations were invented. It can affect various everyday situations, consider constructions and many other areas. Including the economy.

## Introduction

Economic growth models allow you to assess the development and future prospects for the entire economic sector of a country or even a region and the whole world. Modern science distinguishes three main groups:

- Keynesian models. They are based on the dominant role of demand, which should ensure macroeconomic balance. Here, investments play the role of a decisive element, which increase profits through a multiplier. The simplest representative among all the diversity is the Domar model (single-factor and single-product). But it allows you to take into account only investments and one product. According to this model, there is an equilibrium growth ratereal income, which is carried out due to production capacity. At the same time, it is directly proportional to the savings rate and the value of the marginal productivity of capital. This ensures the same growth rate of investment and income. Another example is the Harrod growth model. According to it, the growth rate is a function of the ratio of income increase and capital investment.
- Neoclassical models. They view economic growth in terms of factors of production. The basic premise here is that each of them provides a certain proportion of the product being created. That is, economic growth, from her point of view, is simply the total result of labor, capital, land and entrepreneurship.
- Historical and sociological models. Used to describe growth in terms of the past. This often assumes the presence of dependence on certain socio-psychological factors. The most famous among all the diversity is R. Solow's model of economic growth.

The main trends in modern economic theory are the developments of Keynesians and neoclassicals. Let's look at them in more detail and then the individual models.

## Keynesianism

Its central problem is the factors that affect the level and dynamics of national income, as well as its distribution for consumption and savings. This is what Keynes focused on. Linking the volume and dynamics of national income, hebelieved that it was the shift in consumption and accumulation that was the key to solving all problems and achieving full employment. So, the more investment there is now, the less consumption. And this creates the prerequisites for its increase in the future. But one should look for a reasonable balance between saving and consumption, and not go to extremes. Although this creates certain contradictions for economic growth, but most importantly, it provides conditions for improving production and, as a natural result, multiplying the national product. So, for example, if savings are greater than investments, then this indicates that the potential economic growth of the country has not been fully realized. Therefore, it is necessary to look for the golden mean. After all, the other side is also undesirable. So, for example, if investments are more than savings, then this leads to overheating of the economy. As a result, inflationary growth in prices increases, as well as the number of borrowings abroad. Keynesian models of economic growth make it possible to establish a general relationship between investment and savings. At the same time, the growth rate of national income depends on the rate of accumulation and the effectiveness of the funds used.

## Neo-Keynesianism

Initial developments had a significant drawback - in the long run there is a significant difference between tomorrow's investment and today's savings. After all, for a number of reasons, not everything that is postponed, then becomes an investment. The level and dynamics of each parameter depends on a largethe number of factors. And here neo-Keynesian models of economic growth came to the rescue. What is the essence of this approach? As you know, savings are mainly formed due to income (the more it is, the higher they are). Whereas investments depend on a large number of different variables: this is the market situation, the level of interest rates, the amount of taxation, and the expected return on investment. An example is the Harrod model. It uses the values of guaranteed, natural and actual growth rates to calculate various scenarios. The last is the initial one, and then, by performing mathematical manipulations, the necessary calculations are obtained. At the same time, the final result is influenced by the amount of accumulated savings and the capital intensity ratio. In positive conditions, the growth of production allows to provide for the increased population.

## Specific Neo-Keynesianism

The more there are savings, the greater the investment and the higher the rate of economic growth. At the same time, there is a relationship between the coefficient of capital intensity and the rate of increase in the economic sector. Of particular interest is a new concept introduced by Harrod, namely the guaranteed growth rate. So, if it corresponded to the actual one, then one could observe a stable continuous development of the economy. But the establishment of such a positive balance is an extremely rare situation. In practice, the actual rate is lower or higher than the guaranteed one. This state of affairs, in essence, affects the decrease or increase in the dynamics of investment. ExceptTo do this, according to his model, it is necessary to observe the equality of savings and investments. If there are more of the former, then this indicates the presence of unused equipment, excess stocks and an increase in the unemployed. Significant investment demand leads to overheating of the economy. In general, it must be understood that neo-Keynesianism is simply a more advanced concept, providing for strong state intervention in the economic life of society.

## Neoclassical movement

Here, as a basis, is the idea of balance. It is based on the creation of an optimal market system, which is regarded as a perfect self-regulatory mechanism. In this case, it is possible to use all production factors in the best possible way not only for one subject, but for the entire economy as a whole. But in reality, this equilibrium is unattainable (at least not for a long time). But the neoclassical model of economic growth allows us to find the place and cause of such deviations. At the same time, a number of interesting positions were put forward. Thus, in Western countries, the so-called concept of "economic development without growth" is quite widespread. What is its essence? It is no secret that, on the basis of the scientific and technological revolution, a high level of per capita production was achieved there. At the same time, population growth rates are falling significantly, stagnating or even going negative. Another statement of the supporters of this concept is the existing violation of the biosphere and the limited fuel and raw materials resources. And this means that it is necessarydevelop, but keeping in mind that the resource base is limited. And billions of tons of oil will not appear from scratch. And now let's look at some interesting developments.

## Harrod-Domar model

Calculates dynamic equilibrium under full employment conditions. According to this model, in order to maintain full employment, it is necessary to achieve a situation in which aggregate demand increases in proportion to economic growth. It has a number of preconditions:

- Capital intensity.
- Investment lag is zero.
- Product output depends on one resource - capital.
- The rate of labor expansion and productivity growth is constant and exogenous.
- Additional capital adds income to GDP equal to the result of its multiplication by the productivity factor.

## Multi-factor economic growth model

Also known as the Cobb-Douglas production function. It was created to find out what sources can be used to ensure economic growth. In this case, two factors are considered the most important: labor resources and capital. But thanks to the improvement of production relations, such points as natural resources, an increase in the quality and coverage of education, the achievements of science, and so on, were also highlighted. How significant is this? For example, the American economist E. Denison believes that economic growth in the United States was mainly due to scientific and technicalprogress.

## Solow Growth Model

The methods proposed by Harrod and Domar have a number of significant drawbacks. Not surprisingly, they met with a lot of criticism. The most successful among them was Robert Solow. The model he created is based on the Cobb-Douglas production function. But with a slight difference: exogenous neutral technical progress is taken into account as a factor in economic growth. And on a par with labor and capital. Although it is not without flaws. First of all, this refers to the exogenous nature of scientific and technological progress and the savings rate.

But first things first. Income is spent on investment and consumption. This means that it is possible to establish an identity or express the specific per unit of labor with constant efficiency. At the same time, there is a ratio of investments and savings. As an alternative, the unit of labor can also be used instead of the latter. The value of the ratio is the savings rate. What makes this approach possible? Data on the state of the economy! Thus, if investment is less than the required level, which takes into account population growth, capital depreciation and the result of technical progress, then this indicates that the capital-labor ratio of labor is falling with constant efficiency. The situation may be the other way around. In this case, the equilibrium is determined based on the established stability condition.

## The golden rule of accumulation

The country's economic growth model, created by R. Solow, allows you to find the optimalsavings rate level. In this case, the highest consumption is achieved with the potential for the future. If we formulate this in the framework of the usual language, then the savings rate should correspond to the indicator of elasticity of specific output with respect to capital-labor ratio. If the economy does not reach the level of the golden rule, then at the initial stage, a significant drop in consumption is possible. But in the future, presumably, growth awaits. Much depends on what preferences exist for current or future consumption. This applies both to ordinary citizens and to legal entities, and especially to the state. How?

For example, a citizen has free cash. He knows nothing about economic growth models, growth factors and other obscure phrases. But the citizen thought about his pension and decided to become a member of a non-state pension fund. And he pays part of his salary to an individual account. He does not know about it, but, in fact, he transfers the funds to the structure that invests them. That is, finances do not just go as savings. They are an investment that a certain legal entity will receive through an intermediary.

## Display models

The best option is with the help of mathematics. But in this case, understanding the information can be problematic for people who are not specialists. Take, for example, any good model, correctly calculated and correct. But what if it is several sheetsmathematical formulas? After all, managers, as a rule, do not have time to study econometrics, linear programming and other complex sciences. Therefore, it is possible to display economic growth in a graphical model. Although this requires additional work, it allows you to transform the data into an understandable form. As an example, we can cite models built on the relationship "investment - total income". What should be displayed in this case? And the fact that the higher the level of investment, the greater the total income and the amount of output. Economic growth in the graphical model of the curve of production factors allows you to display what and how can affect the development trend. And how management uses this data is his concern. Although there are many things to consider. That is, one schedule is not enough. For example, you should display both the effect of the multiplier and the accelerator. After all, in the end it will be possible to come to the conclusion that the economic growth of supply will be greater than demand. And this is a direct path to overheating the economy. Of course, this is not a completely negative process, because all commercial structures that cannot be competitive are eliminated. But this is accompanied by certain social upheavals, uncertainty about the future and a number of other problems.

## Conclusion

The article examined the main models of economic growth, as well as the groups in which they are combined. It should be noted that the topic is not limited to this information only. FirstFirst of all, it is necessary to take into account the fact that none of the considered models allows making forecasts with 100% accuracy. After all, only swindlers who “know” what economic development is can speak with such confidence. Growth models, however, make it possible to model a development scenario based on the data that is currently available. Due to the fact that they cannot take into account many factors, an error indicator is introduced, and the probability that the described option will be implemented is also calculated. Therefore, it cannot be said that a certain model is more preferable than some other.

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