Q. Explain Growth theory?
The purpose of this topic is to try to explain growth in GDP. The models in this topic are very different from the rest of the models as they use only production function and factors of production to explain growth. Growth models are significant, for instance, if you want to understand why some countries grow faster and have a higher living standard than other countries.
By growth, we mean percentage change in real GDP. We use real GDP to eliminate the effect of inflation. In this topic, it is perfectly OK to think of inflation as being zero in which case real and nominal GDP are the same.
In this topic we begin by describing the aggregate production function. The rest of this topic will look at some different growth theories.