New growth theory

New Growth Theory (NGT) is related to the economy, where it views technological progress as an outcome of economic activity. Earlier, the theories believed technology to be the product of non-market forces, but NGT finds that technological development is an outcome of market functions. 

It also believes that, unlike physical objects, knowledge as a commodity and technology deliver higher returns and drive growth.

Economists studying the impact of political issues to analyse growth and its determinants find that all the items related to the standard of living come from valuable arrangements of things found in the earth's crust and atmosphere. 

No amount of investment or saving or macroeconomic state or tax and spending incentives can get sustained economic growth unless it is supported by the large and small technological discoveries required to use natural resources appropriately.

The theory was suggested by Romer, who said that the classical suggestion of gathering more physical capital could not make us rich as all such kinds of physical capital have diminishing returns, and the economies cannot grow by adding such raw stuff of the same kind.

The physical world is known for diminishing returns where the first version is expensive, and the next versions come cheaply. Earlier economists believed in the effect of diminishing returns, but such a system of equations has not proved helpful in modern situations.

Non-Rival markets -

Earlier economists believed that all goods and services already existed in the market and the sole job was to allocate it to the competing parties. Still, the system of multiple equilibria is present, and the market processes are deterministic.

Economists have focused on ordinary goods and products and allocating goods and services but do not talk about non-rival goods as they are completely different from competitive goods. Some special public goods are neither rival nor excludable, but free markets do not produce enough public goods.

Residual production -

A high price tells consumers to consume less and producers to produce more. In contrast, a low price discourages production and encourages consumption. Still, in the case of knowledge, it is created, and it is not a fully excludable and socially valuable investment in knowledge is not made.

When there are different types of knowledge in the market, firms may determine the type they need to acquire, and it may be expensive to get potentially better technologies or the firms may suffer from a productivity slowdown due to it.

Monopoly

Knowledge-based economies follow monopolistic competition. In such areas, leading producer face permanently declining costs, eventually as a single firm dominates the market. An education technology spending business competes not based on price but on its monopoly with a particular differentiated product or service.

Human capital spends average years in schooling, but its economic impact cannot be measured. Certain general-purpose technologies (GPTs) are useful to many sectors, and there are multiple adoption models where economists are trying to analyse the cost of schooling as a per cent of GDP, job training and learning expense and R& D expense as a part of the GDP.

The productivity definition of knowledge is similar to the measure of embodied knowledge. It is assumed that the productivity measure of knowledge commodity is made as residual. The growth related to such factors cannot be explained, and it is often called total factor productivity (TFP).