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Long-run regional growth models concentrate on factors that shift the production
possibilities curve outward. The changes in employment analysis in capther 7
could result from a shifting production possibilities curve, but short-run theories
give no reason for such a shift to take place.
How can an economy prepare itself for long-run sustainable growth? Two
macroeconomic model underline long-run regional economic growth analysis :
the neoclassical growt model of Solow and Swan, and the new or endegenous
growth theory. The two models are not only the foundations for different
concepts of long-run sustainable growth, but they also support different policy
prescriptions for achieving this growth. The neoclassical model analyzes regional
growth as if all economic activity were located at a point, as do most
macroeconomic models, but the new growth theory acknowledges, among other
things, that a location relative to some focal point is important in determining a
regions growth potential. These theories are characterized by their focus on the
dynamics or the process of change more than on the change itself
This chapter will first review the neoclassical growth model and evaluate its
policy implications. We will then focus on the endegeneous growth theory. This
theory highlights the importance of innovation and the diffuson of thecnology as
the factor determning growth. Finally, we will explore how agglomeration
economics can foster innovation and how capital, entrepreneurship, and labor
combine to create innovation and transmit technological advances.
NEOCLASSICAL GROWTH THEORY
Slow and Swan neoclasical growth theory applies production theory to an entire
region or country as if it were a firm producing only one type of output
Output is function of labor, capital, and exogeneously acquired technology that is
Where Y, K, L are the level output, capital, and labor respectively. The production
function exhibits constant return to scale. The level of technical progress, x, does
not vary across space. The technology available to cities and develop economies
is immediately available to rural, low income areas. Capital and labor are equally
productive everywhere. The rate of return to capital is constant and equal to the
national interest rate. The marginal product of labor equals the wage paid in a
perfectly competitive market.
According to the aggregate production function models, regional output is a
function of aggregate capital and labor. Researchers have also added spending
on energy or government spending on infrastructure as inputs. Growth occurs
when the amount of resources increases or when technology changes shift the
production function upward. If labor is the input under consideration, increasing
the amount of capital shifts the aggregate production upward because labor is
more productive if the capital/labor ratio is high.