Economic Growth Essay -- Economy, Neoclassical Model

According to the New Classical Model, economic growth can be achieved by accumulating labor, capital and other factors of production. Since all these factors experience diminishing marginal returns, the economy can only achieve a steady equilibrium income through continuous increase in saving and investment but at the same time reduce population growth. However, a policy that helps to increase both savings and investment but at the same time reduce population growth especially in developing countries is difficult to be implemented. This was supported by Blomstrom and Kokko (2003) who claimed that developing countries have low-income that lead to low savings with higher population growth rates. Solow (1956, 1957) also recognized the importance of technical progress as a determinant of economic growth. Technology is an exogenous factor. Per capita income cannot be increased to a steady state or even to a high level income economy unless these technologies are converged. The modern growth theory also supported the importance of technological progress because it can convert diminishing returns to increasing returns. Technological progress can take place in the form of education, training and research & development (R&D). With this, developing countries have the potential to grow faster. Blomstrom and Kokko (2003) confirmed that the potential of converting this knowledge of technology depends on the economic level of capital. The economic level of capital in a nation is determined by two sources. One is the domestic capital and the other is the foreign capital. Domestic capital is obtained through domestic savings made by the public and private sectors. Meanwhile, the foreign capital is obtained through the inflow of foreign dire... ...ious channels that create location advantage. Thus, location advantage can be obtained through channels like financial development, human capital development and environmental condition. In contrast, Chakraborty and Nunnenkamp (2008) claimed that economic growth influenced by location advantage does not necessarily bring positive impact but also negative impact to the economy. This supported the study by Li and Liu (2004). When foreign direct investment inflow takes place it can create job opportunity, economic growth, solve indebtedness and transfer technology but at the same time it can also create negative impacts like deficit in the balance of payment, pollution, economic dependence and social problems. Kugler (2005) also claimed that foreign direct investment can also affect industry negatively as well as positively, where it is usually underestimated.