What Is New Growth Theory?
The new growth theoryis an economic concept, positing that humans' desires and unlimited wants foster ever-increasing productivity and economic growth. It arguesthat real gross domestic product (GDP)per person will perpetually increase because of people's pursuit of profits.
Key Takeaways
- The new growth theory presumes the desire and wants of the populace will drive ongoing productivity and economic growth.
- A central tenet of new growth theory is that competition squeezes profit, forcing people to constantly seek better ways to do things or invent new products in order to maximize profitability.
- The theory emphasizes the importance of entrepreneurship, knowledge, innovation, and technology, rejecting the popular view that economic growth is determined by external, uncontrollable forces.
- Knowledge is treated as an asset for growth that is not subject to finite restrictions or
diminishing returns like other assets such as capital or real estate.
Understanding New Growth Theory
The new growth theory offered a fresh take on what engineers economic prosperity. It emphasizes the importance of entrepreneurship, knowledge, innovation, and technology, challenging the view of exogenous growth in neoclassical economics that economic progress is determined by external, uncontrollable forces.
Competition squeezes profit, so people have to constantly seek better ways to do things or invent new products in order to maximize profitability. This concept is one of the central tenets of the new growth theory.
The theory argues that innovation and new technologies do not occur simply by random chance. Rather, it depends on the number of people seeking out new innovations or technologies and how hard they are looking for them. People also have control over theirknowledge capital—what to study, how hard to study, etc. If the profit incentive is great enough, people will choose to growhuman capitaland look harder for new innovations.
A significant aspect of the new growth theory is the idea that knowledge is treated as an asset for growth that is not subject to finite restrictions or diminishing returns like other assets such as capital or real estate. Knowledge is an intangible quality, rather than physical, and can be a resource grown within an organization or industry.
New Growth Theory Example
Under the new growth theory, nurturing innovation internally is one of the reasons for organizations to invest in human capital. By creating opportunities and making resources available within an organization, the expectation is thatindividuals will be encouragedto develop new concepts and technologyfor theconsumer market.
For example, a large enterprise might allow part of its staff to work on independent, internal projects that may develop into new innovations or companies. In some ways, the enterprise lets them function like startups being incubated inside the organization.
The desire of the employees to launch a new innovation is spurred by the possibility of generating more profits for themselves and the enterprise. This can be especially true in the United States, as commerce is increasingly driven by service-type companies. Software and app development may take place within companies, following the new growth theory.
Achieving such knowledge-driven growth requires a sustained investment in human capital. This can create an environment for skilled professionals to have an opportunity to not only fulfill their primary jobsbut also explore the creation of new services that can be of benefit and use to the broader public.
Special Considerations
New growth theorists believe that companies generally undervalue the usefulness of knowledge and, as a result, argue that it is mainly up to governments to invest in human capital. Governments are encouraged to facilitate access to better education, as well as provide support and incentives for private-sector research and development (R&D).
FAQs
The New Growth Theory (NGT) is based on the wants and needs of individuals as the driving factor behind economic growth; individuals buy, sell, and invest based on their personal wants and needs, ultimately causing real gross domestic product (GDP) figures to rise.
What is the new growth theory quizlet? ›
We have an expert-written solution to this problem! The new growth theory states that. Firms will add to an economy's stock of physical capital leading to increases in real GDP but at a increasing rate.
What is growth in economics with example? ›
Economic growth refers to an increase in the size of a country's economy over a period of time. The size of an economy is typically measured by the total production of goods and services in the economy, which is called gross domestic product (GDP). Economic growth can be measured in 'nominal' or 'real' terms.
What does the new growth theory emphasize the role of? ›
The new growth theory emphasizes the role played by choices and innovation. It emphasizes three key aspects of market economies: Human capital grows because of choices. Discoveries result from choices.
What is an example of the new growth theory? ›
Growth-oriented individuals adapt to new technologies quickly; to elevate their status, they buy more products. Directly or indirectly, all this induces positive investments and higher consumption—market supply and demand increase. Therefore, a capitalistic market is an example of the new growth theory.
What is the theory of new growth? ›
Again, NGT is – at its core – the theory that personal, individual forces are ultimately the drivers of economic progress. The focus is on the individual (that which fosters individual growth fosters economic growth).
What is the growth theory also known as? ›
Endogenous Growth Theory
The Endogenous Growth Theory states that economic growth is generated internally in the economy, i.e., through endogenous forces, and not through exogenous ones. The theory contrasts with the neoclassical growth model, which claims that external factors such as technological progress, etc.
What are three examples of growth? ›
An example of growth is a boy getting an inch taller between the ages of 14 and 15. a stage or condition in increasing, developing, or maturing The tree reached its full growth. 2 : a natural process of increasing in size or developing growth of a crystal. 3 : a gradual increase the growth of wealth.
What is a simple example of growth? ›
For example, the year that she was 11, Keisha got taller by two inches. This is an example of growth because it involves her getting physically taller and is quantifiable (two inches). On the other hand, maturation is the physical, intellectual, or emotional process of development.
What is the definition of economic growth quizlet? ›
Economic growth is defined as. an increase in an economy's production capacity or potential GDP. The rate of economic growth is the key determinant of. changes in a society's standard of living—which is commonly measured using real GDP per capita.
Endogenous growth theory says that growth is primarily determined by a country's population growth and internal innovation. New growth theory is a concept that presumes the desire and wants of the populace will drive ongoing productivity and economic growth.
How does the new growth theory differ from the traditional growth theory? ›
Answer and Explanation:
For instance, the classical growth theory suggests that economic growth declines as the population grows and scarce resources. On the other hand, new growth theory postulates that the desire of humans and their unlimited wants continually increases productivity and the economy's growth.
What is the new growth theory How does the new growth theory differ from the growth theory developed by Robert Solow? ›
the new growth theory focuses on technological change and the quantity of capital available to workers whereas the Solow growth theory states that accumulation of knowledge capital is a key determinant of economic growth.
What are the five stages of growth theory? ›
How many stages of economic growth were described by Rostow? The five stages that Rostow lists are: traditional society, preconditions to take-off, take-off, drive to maturity, and age of high mass consumption. Rostow explained that these are the steps that should be taken by a nation to become fully developed.
What is a real life example of economic growth? ›
Investing in new factories, equipment, or technology increases their production capacity and allows them to produce more goods and services. For example, constructing new highways and railways in India has boosted the country's economic growth by improving connectivity and facilitating the movement of goods and people.
What are the two growth theories? ›
Neo-classical theory exclaims the factors of labor, capital, and technology as the essential components of economic growth, and modern growth theory cites needs and desires as the fundamental drivers of economic growth.
What is one of the major tenets of the new growth theory quizlet? ›
According to new growth theory, more technological advances will occur when the rewards are greater. In the United States, a patent gives the inventor of a product the exclusive right to make, use, or sell the product for 50 years.
What does new growth theory suggest about the accumulation? ›
New growth theory suggests that the accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable. How does the federal government intervene in the market to increase the amount of knowledge capital?
