Q. Illustrate neo-classical growth model?
The main purpose of another significant growth model, neo-classical growth model, is to explain how it is possible to have a permanent growth in GDP per capita. The model was developed by Robert Solow in 1960s and it is sometimes known as the Solow growth model or the exogenous growth model.
Neo-classical growth model must not be confused with the neoclassical synthesis. 'Neo' means 'new' - the neo-classical growth theory is a 'new version' of the classical growth model.
Crucial difference between classical and neo-classical growth model is that population is endogenous in the former and exogenous in the latter. In the classical model, population will increase or decrease depending on whether GDP per capita is higher than or lower than survival level. In the neo-classical model population growth isn't affected by GDP per capita (though the population growth will affect the growth in GDP per capita).
In the neo-classical model, it's the technological progress only that affects GDP per capita in the long run. We will have a permanent increase in GDP per capita when there is a technological development which increases productivity of labour. Permanent growth in GDP then requires continuous technological progress.
It isn't possible for the government, except temporarily, to affect growth rate in the neo-classical growth model. Government may be able to affect GDP per capita (and so is the growth rate) however the growth rate always returns to the level determined by technological progress. The same is true for savings. An increase in savings may have a temporary effect on GDP though it will have not any effect in the long run.