How the Models Relate to Economic Growth Essay Example | Topics and Well Written Essays - 1500 words

How the Models Relate to Economic Growth - Essay Example This study outlines that numerous growth models have been developed by scientists to explain economic growth; Basic Economic Growth Model This model explains that output is a function of two variables, capital stock and labor, in which capital stock includes the infrastructure such as roads, bridges, land etc and labor is the population that are willing and able to work. The formulae that explains this function is Y=F (K, L) where Y stands for output being a function of K and L, capital stock and labor respectively.  Ã‚  The two variables increase resulting in increase in the output Y. This increase can be brought about by investments and population growth. The supply of labor is actually dependent on the demographics of a country. The model given below explains the same relation i.e. when capital and labor increase so does the output giving it a directly proportional relationship.            According to the paper Easic Economic Growth Model    Harrod-Domar Growth Model This was developed in the 1940s by two economists Roy Harrod and Evsey Domar. This model is based on a function by the name of constant returns to scale, which basically means that the two variables capital and labor are used in a constant ratio to each other.  Ã‚  Output is derived in this model by the combination of the capital and the labor, where their graphs meet, called as the isoquants. This model has the assumption that capital and labor are always used in a fixed proportion to each other. The equation for this model is Y=K/v where v represents the capital output ration that can be found by dividing capital with the output or the investment Y.  Ã‚  In the graph below we see that capital and labor are being used in the same proportion giving us an intersection point and when a line is drawn through  those points  to get an isoquant.    As the discussion declares rather than having fixed factors of production, capital and labor could be substituted providing flexibil ity, having a curved isoquant and not the L shaped one that was present before. So this means that output can be increased in three ways, by firstly increasing capital and labor in equal proportion, to increase capital or to increase labor. In this model a change in technology would also lead to increase in the output.                   From this study it is clear that Solow (Neoclassical) Growth Model Solow also developed a procedure by the name of ‘sources of growth analysis’ which explains how much of the economic growth can be attributed to capital, increase in the labor force or their efficiency. The formulae that can be applied is Y=F(K, L, A) where K and L are capital and labor respectively whereas A is a variable that can be anything beside the two variable that can influence growth, for example technology, skill level, health, education etc. So A can be anything that can be an ignored factor helping the economic progress. However to identify these n umerous