Question 2

When we first look at the statement this question supplies us with on a basic level, i.e. when we look at the Stylised facts of the Neoclassical Growth model, we can begin by saying that it is true. Facts 8, 9 and 10 for the World Economy as a whole tell us that the “average growth rates of output per worker since the end of the Second World War shows huge variation across countries”, and that some countries have had ‘Growth Miracles’ (e.g. China) while some have had ‘Growth Disasters’. If we combine this with Fact 4 for developed economies, which explains that “Capital per worker rises continuously and often at the same rate as output per worker”, then one could attribute the differences in the growth rates of output per worker to the different growth rates of Capital per worker, or in other words Capital accumulation. However, can we be sure that this is a causal effect?

To begin with, we must make an important distinction here in terms of whether a country is in it’s ‘Steady-state’ as described in the Neoclassical growth model. If all countries or the countries in question are in their steady state, we know that variables per effective worker e.g variable divided by Index for productive efficiency (A) and size of labour force (L), remain constant, while variables per worker e.g. variable divided by L, grow at rate g, where g is the growth rate of A, and finally aggregate variables such as Output grow at rate n+g, where n is the growth rate of labour. It is clear from these proven facts that if countries are at their steady states on the Balanced growth path, then the growth rate of a country, is not related to the rates of capital accumulation, but grows at the rate of n+g for that country, therefore rendering the statement in question false.

Consequently, we must look for truth in the statement where countries are not in their