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Briefly contrast the neo-classical theory of growth with cumulative causation theory by describing what each would predict in the following scenario. A 50,000 person metro area suffers a major loss of jobs (1500) as a result of a large business closing shop. What would each theory predict would happen in the years following the closure? (7 points

According to Neo-classical theory of growth model which believes that to raise an economy's long-term trend, the rate of growth requires to increase in the labor supply and an improvement in the productivity of labor and capital, the model would predict a temporary growth rate since the ratio of capital to labor would go up due to reduction of workers. The long-term result would be a decline in the marginal product of additional capital and the economy would eventually move back.

According to Cummulative causation theory – a principle that predicts that multiple changes are set in motion by a single event - would in this case predict a backward causation for the 1500 persons who lost job through business closure. This would thereby create a reverse effect of the opening of new business. The chain-reaction nature of cumulative causation theory would be felt by other business that depend on closed premises and laid-off workers. This would have a severe effects on other premises as well. 2. The City of Cary is about 25 miles east of Raleigh, though both are part of the larger Upstate region. In general, land values in Cary are lower than those in Raleigh, but it has access to a similar set of workers and transportation networks as the rest of the region. What would the various theories that we have discussed tell you about what avenues the City of Cary might pursue in trying to grow its economy?

According to Neo-classical theory, the City of Cary would pursue the City of Raleigh because considering the long term effect, other industries will be competing for the same space and there would be no option other than expanding the premises. Due to varying the amounts of labor and capital in the production functionan equilibrium state can be accomplished. When a new technology becomes available, the labor and capital need to be adjusted to maintain growth equilibrium, and this would be a win. For Cumulative causation, the prediction would be a vicious cycle since the increase in labor cost would cause chain reaction in a backward movement of business instability. What are the potential difficulties that Cary might face in pursuing development?

The difficulties the city of Cary might face are:

Increased capital cost due to increased cost of land.

Increased Labor cost due to increased cost of land which causes the cumulative Causation as seen in the causation model which leads to high cost of living of workers.

Reduction in Demand due to fewer consumers who would prefer to live in the outskirts of Raleigh because of cheaper land and hence better living condition. Be specific in your ideas. Answer the questions with respect to the ideas that we have discussed in class. (7 points) Hint: think about trade theory, cumulative causation and unbalanced growth, and neoclassical theories in particular 3. the authors in Malizia and Feser argue that economic development professionals need to understand economic growth theories in order to do their jobs well. Regardless of your own feelings about the statement, present a short counter-argument to that statement. You may draw upon issues from class or from your own opinion, but you should try to construct coherent arguments.

Understanding economic frowth theories should not be a requirement for all economic development

proffessionals. This makes the entire business approach lack diversity and constricts business to certain

set of rules. This in a way kills business diversity in the long-term. For instance if all businesses had a

similar approach there would not be competition. Citing Neo-classical theory that opposes the

reduction of labor force, sometimes the business requires a reduction in labor to maximize the profit

because the temporary nature of the result is relative.

References

Raines, J. P., & Leathers, C. G. (2000). Economists and the stock market: speculative theories of stock market fluctuations. Cheltenham, UK: Edward Elgar.

Caves, R. E. (1960). Trade and economic structure; models and methods.. Cambridge, Mass.: Harvard University Press.

Raines, J. P., & Leathers, C. G. (2000). Economists and the stock market: speculative theories of stock market fluctuations. Cheltenham, UK: Edward Elgar.