Term Paper: New Growth Theory

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New Growth Theory

The endogenous New Growth Theory, when applied to the economy in general, refers to increasing returns for the national economy, on the scale of increasing business intelligence and consequent productivity. This means that innovation drives the economy. New knowledge thus drives economic growth. In the 21st century, labor and capital are no longer the main drivers for economic growth. This means that business is seen as a learning experience, and that business people learn from both their mistakes and successes while performing their work. With the rapid advance of computers and the Internet, knowledge has risen on the scale of economic commodities to reach a peak of growth not experienced often by either product or service. In fact, nearly unlimited opportunities for growth are provided by the use, buying and selling of knowledge.

The reason for this is the use of knowledge and the infinite ways in which it can be applied. Because it can be reused at zero marginal cost, knowledge has provided its patrons with huge profits at marginally zero losses.

The Internet economy is of such a nature that many revenues and jobs are emerging with the start of new Internet companies. Among these are the highly profiled "dot coms." There are two kinds of dot coms that can be distinguished: the digital and physical dot coms. Physical dot coms are those selling physical goods and services, whereas digital dot coms focus mainly on products created using information technology. These reach the customer immediately upon being ordered.

An interesting phenomenon is that digital dot coms such as Yahoo, Ebay and America Online have shown very impressive growth in terms of revenue and job creation, whereas physical dot coms have not. The reason for this, according to economists, is mostly that physical dot coms offer customers little that is different from physical stores. Apparently customers prefer to buy their physical products as they have done traditionally. Another interesting phenomenon is the prominent and highly publicized failure of certain dot coms during the year 2000. This however has not deterred digital companies from entering the economy and making a success of their business. This, together with the growth margins associated with successful digital dot coms, implies that a learning effect is taking place. Thus, in terms of the New Growth Theory, it can be said that these digital dot coms are indeed endogenous. The reason for this is firstly that the companies are based upon knowledge rather than labor and products, and secondly that learning and improvement takes place while business is conducted for the companies. Thus financial performance improves according to the learning effect taking place. The success of the learning effect is shown by the increases experienced by digital dot com companies. The predictions for digital dot coms are based upon growth figures from past… [END OF PREVIEW]

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