Neoclassical model and give its technical change
The neoclassical model was without technical change. We merely took an aggregate production function and elaborated upon the model. However, we know that in the Solow model the key to growth is not accumulation of capital, or increasing the saving rate.
After capital accumulation and growth in labour force or population had been accounted for, some part is left over which is roughly an indicator of technical progress.
Which classification of technical progress is likely to serve us well in analysing growth models, in particular the neoclassical one? Given the rate of growth of labour force, say g, and propensity to save s, we know the economy will reach an equilibrium level of output per worker (let us denote it by y*) and an equilibrium level of capital per worker (let us denote it by k’).
If the economy is on a balanced growth path, and the rate of growth of the labour and saving rate are fixed constants, any upward shift in the per-worker production function will mean that the equilibrium value of k has changed, that we get a new capital-labour ratio.
Recall that Hicks’s technical progress classification requires that comparison of point’s pre-technical progress and post-technical progress per-worker output curves are restricted to points having the same capital-labour ratio.
So to study steady-state models of technical change, the Hicksian scheme of classification is not of much use. We shall see that it is Harrod’s schema is of more useful in studying steady-state growth.
This point can be repeated by saying that if long-term, sustained steady-state has to take place with technical progress, and then the technical progress has to be of Harrod-neutral, that is, of a labour-augmenting form.
Get this well. It is not Harrod’s entire classification Chema that is being talked about. Specifically, for steady state growth to occur in simple growth models with technical progress, the technical progress must be specifically Harrod-neutral, or labour- augmenting.
Output per worker grows at the rate u when measured in natural units and remains constant when measured in efficiency units. In steady state K N stays constant, that is why it is only Harrod-neutral technical change that is compatible with steady/State growth. Output per worker and capital per worker, that is, the capital- labour ratio stay constant when measured in efficiency units.