David Stone's Entry For The 2004 Moffatt Prize in Economics
When using any economic model to portray a real world problem and to study the effects of various resolutions, the usefulness of the model is most contingent upon its ability to simulate the real world without excessive oversimplification. One of the questions this may lead to is whether or not the neoclassical growth model is a useful tool for economists and policymakers in understanding global poverty[/links] and developing policies to reduce poverty. This will be the topic of discussion in this paper and we will find that while there are reasons one would use the neoclassical growth model to analyze the plight of the world's poorest, it fails to account for many important factors that are key to scrutinizing this problem from every possible viewpoint.Foremost on the agenda, we must explore the ideas and concepts that underline this model. The neoclassical growth model emphasizes the role of technological progress and labor productivity in maintaining a sustained long-run rate of growth. Population growth, [link url=http://economics.about.com/library/glossary/bldef-depreciation.htm]depreciation
of capital, and, most notably, technological progress directly affect the dynamics of the growth process. One major idea that encompasses the frameworks of this model underlines the assumption that over the long run, economic growth is independent of the savings rate (or equivalently, investment). However, the economy experiences a transitional state of growth or decline in the capital stock, which could be prolonged over a period of decades, due to fluctuations in investment generated from savings that is greater or less than required investment. In steady state, therefore, the growth rate of output is equal to the rate of population growth and the rate of technological progress. This shows that output per worker will grow at the rate of technological progress in a state of balanced growth over the long run. The neoclassical growth model is achieved by assuming a diminishing marginal product of capital, in which the economy gradually moves to a point where savings provides only sufficient enough investment to cover depreciation. In order to make saving and investment equal, we assume that the economy is closed. This is a significant and unrealistic assumption to make, yet allows the issues of trades surpluses and deficits to be overlooked. Taxes and government spending is also ignored in order to put focus on the behavior of private savings. Lastly, we assume private savings to be proportional to income.Be Sure to Continue to Page 2 of "The Neoclassical Growth Model and Global Poverty".
