Extensive and Intensive Growth in a Neoclassical Framework

Extensive growth based on the expansion of inputs is likely to be subject to diminishing returns. Therefore it is often viewed as having no effect on per capita magnitudes in the long run. This Paper argues that periods of extensive growth through capital accumulation may be a precursor to periods of intensive growth during which output per unit of input grows through endogenous technical change. Such a sequence of stages of development occurs as capital accumulation affects the incentives to engage in labour-saving technical change. A steady rise in the capital-labour ratio affects the relative scarcity of factors of production, their (expected) relative price, and induces innovation investments.