Explain how the neoclassical growth model can be extended to enhance our understanding of economic growth.

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Explain how the neoclassical growth model can be extended to enhance our understanding of economic growth.

INTRODUCTION

AIM AND OBJECTIVE
The aim of this essay is to clarify how the neoclassical growth model can be used to explain economic growth by taking into account two new inputs: Natural Resources (R) and Land (T) by substantiating it with relevant research.

THE NEOCLASSICAL GROWTH MODEL
According to the Neoclassical Solow Model, economic growth arises due to influences outside economy. As an exogenous growth model it focus on four variables: output (Y), capital accumulation (K), Technology (A) and labor or population growth (L) in order to explain economic growth.
In 1798, Malthus raised the issue that once population growth had outpaced agricultural production subsistence-level conditions would result and hence, convinced other economists that natural resources, production and other environmental considerations are critical in the long run.

THEORETICAL ASSUMPTIONS OF THE MODEL

SOLOW MODEL
The analysis of the Cobb-Douglas function is now extended to include natural resources (R) and land (T).

BASELINE (130)
The analysis of the Cobb-Douglas function is now extended to include natural resources (R) and land (T). Thus the production function, now, becomes: Y(t)=K〖(t)〗^α R〖(t)〗^β T〖(t)〗^γ [A(t)L (t)]^(1-α-β-γ) where, α>0, β>0, γ>0, α-β-γ<1
Whereas the dynamics of capital, labor and the effectiveness of labor are the same as before,
i.e. K ̇(t)=sY(t)-δK(t), L ̇(t)=nL(t) and A ̇(t)=gA(t) it is important to consider the new assumptions that concern the newly added inputs.
As such, because the amount of land is fixed and in the long run the quantities used in production cannot be increased, it is assumed that T ̇...

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...ount;
Intrinsic values (i.e. non-extinction of species) are not taken into account;
Solow was aware of the need for environmental and social accounting and suggested innovation would make it possible for individuals to take decisions precisely and rationally resulting in efficient trade-offs between environmental preservation and consumption.
Problematic because it assumes the possibility of complete information – doubtful as it is possible that some natural impacts are undiscovered or underestimated.
The model shows the hidden assumptions behind the notion of unlimited growth as opposed to predicting the optimum long-term output.
Stock of land is fixed and resource use should decrease, leading to a binding constraint on the ability to produce. In our model, this does not occur because it is assumed in the Cobb-Douglas functions that there are constant returns.

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