how the neoclassical growth theory works
the theory states that short term equilibrium results from varying amounts of labor and capital in the production function the theory also argues that technological change has a major influence on an economy and economic growth cannot continue without technological advances neoclassical growth theory outlines the three factors necessary for a growing economy these are labor capital and technology however neoclassical growth theory clarifies that temporary equilibrium is different from long term equilibrium which does not require any of these three factors special considerationthis growth theory posits that the accumulation of capital within an economy and how people use that capital is important for economic growth further the relationship between the capital and labor of an economy determines its output finally technology is thought to augment labor productivity and increase the output capabilities of labor therefore the production function of neoclassical growth theory is used to measure the growth and equilibrium of an economy that function is y af k l 4however because of the relationship between labor and technology an economy s production function is often rewritten as y f k al increasing any one of the inputs shows the effect on gdp and therefore the equilibrium of an economy however if the three factors of neoclassical growth theory are not all equal the returns of both unskilled labor and capital on an economy diminish these diminished returns imply that increases in these two inputs have exponentially decreasing returns while technology is boundless in its contribution to growth and the resulting output it can produce example of the neoclassical growth theorya 2016 study published in economic themes by dragoslava sredojevi slobodan cvetanovi and gorica bo kovi titled technological changes in economic growth theory neoclassical endogenous and evolutionary institutional approach examined the role of technology specifically and its role in the neoclassical growth theory 5the authors find a consensus among different economic perspectives all pointing to technological change as a key generator of economic growth for example neoclassicists have historically pressured some governments to invest in scientific and research development toward innovation endogenous theory supporters emphasize factors such as technological spillover and research and development as catalysts for innovation and economic growth lastly evolutionary and institutional economists consider the economic and social environment in their models for technological innovation and economic growth 