What Are the Different Economic Growth Models?

While there are many different economic growth models, the classical growth theory, neoclassical growth model, endogenous growth theory and unified growth theory have contributed significantly in this area. Economists use different economic growth models to show how non-economic variables affect how the economy is growing in order to understand why some societies grow faster than others. Critical non-economic variables include the rate of capital accumulation of individuals within the society, flow of invention or innovation, and the growth of the population.

Classical growth theory posits that increased productive capacity with improved capital contributes to stable economic growth. It also explains that agriculture plays a significant role in the growth of any economy. It argues that economic growth will end as the population increases and its resources decrease. The theory was developed by David Humedam Smith and other physiocrats to counter mercantilism. They believed that agriculture plays a key role in economic growth, while focusing on urban industry can cause it to be at a long-term disadvantage.

The neoclassical growth model, also referred to as the Solow growth model for its developer, Robert Solow, is different from other economic growth models in that it consists of several equations that show how output, capital goods, labor-time, and investment affect one another. This model is based on the assumption that countries efficiently use their resources, and as labor increases, its returns diminish. The model illustrates that technology is an important factor of growth, and as technology improves, capital increases, country investment increases and then it experiences overall economic growth.

The endogenous growth theory improved upon the neoclassical growth model by adding the concept of human capital and mathematical explanations for technological advancement. The largest difference between these two economic growth models is that the endogenous growth theory argues that economies do not reach stability, as economies achieve constant returns to capital. It also asserts that the rate of economic growth is dependent on whether the country invests in technological or human capital.

The unified growth theory was created to address the weakness of the endogenous growth theory by explaining qualitatively the different long-term observed similarities of the growth process in economies at different stages of development. Unlike other economic growth models, this model uncovers the variables that are responsible for bringing an economy from stagnation to growth, contributing to the understanding of global differences in economic development. This theory can be used to see how income per capita has diverged during the past two centuries.