Advantages And Disadvantages Of Endogenous Growth Theory

b) Neoclassical Growth Models

The neoclassical growth model was an extension of the Harrod Damor model that included productivity growth as a new term. According to the neoclassical theories, growth comes about in three ways if holding land fixed; increase in the labor supply, capital stock and productivity. Since real output rises as more people take part in a country’s production, increasing labor supply generate a larger output.

Capital increase can have two forms, physical and human capital. Physical capital increase output because it enhances the productivity of labor and provides valuable services directly. Human capital promotes economic growth because peoples with skill are more productive than people without. This can be attained

Poor nations with little human capital cannot hope to catch up industrial nations simply by accumulating physical capital. Therefore, different levels of investment in human capital through training and education help to explain the convergence of per capital income levels and growth rate over time (Mulhearn and Vane1999. 197).

Endogenous growth theory has had remarkable success in giving new energy to the neoclassical research program going back to the fundamental question of the factors that determines economic growth and abandoning the static competitive economic equilibrium. The aim of the theory is twofold; first, to overcome the shortcoming of the Solow and Ramsey models which are unable to explain sustainable growth, second, to provide a rigorous model in which all variable, in particular saving, investment, and technical knowledge are the outcome of nation decision. The augmented Neo-classical model simply extends the basic production function framework to allow an extra input to enter the production function Human capital. The endogenous growth model or approach argues that there should be an additional effect of human capital over and above the static effect on the level of output. This indicates that the endogenous growth models explain growth further with human

Their main argument the put behind this stance is "in the long run, we are all dead." This actually contrasts with the fiscal policy analysis by the classical and neoclassical economics. Fiscal stimulus could actuate production. But, the classical and neoclassical economists don’t believe that this stimulation would overrun the side-effects in "crowding out" the private investment. They say it would first increase the labour demand and raise wages, which intern hurts profitability. Secondly, a government deficit, according to them, increases the stock of government bonds and that will have effect of reducing market price and encouraging higher interest rates as well. This will hence make it more expensive for business to keep financing fixed investment. Thus, efforts applied to stimulate the economy would be finally of a self-defeating outcome.

Harrod and Domar are the first to develop the first macroeconomic model, formally analyze the problem of growth. The model argued that saving, investment technical progress and population growth are the major causes of growth. In their model, production is obtained only by means of physical capital and