The Endogenous Growth Theory

ENDOGENOUS GROWTH THEORY

The endogenous growth theory can be called the new growth theory.

The phrase "endogenous growth" embraces a diverse body of theoretical and empirical work that emerged in the 1980s. This work distinguishes itself from neoclassical growth by emphasizing that economic growth is an endogenous outcome of an economic system, not the result of forces that impinge from outside

The endogenous growth theory is a new theory which explains the long run growth rate of an economy on the basis of endogenous factors as against exogenous factors of the neoclassical growth theory.

Endogenous growth theory also called new growth theory is economic growth generated by factors within the production process (e.g., increasing returns or

A new design enables production of new capital good that can be used to produce output. Because of rights on the new designs can be protected by patents, the machinery producers that purchase those rights get paid quasi-rents out of their production, which provides economic incentive to the knowledge production sector.

2. A new design also increases the total stock of knowledge thereby increasing the productibity of hman capital in the research sector.

In the romer model, we have three sectors, which are

 New designs or research sector which is characterized by perfect competition, uses human capital and the existing stock of capital as inputs.

 Intermeidiate or capital goods sector which is operates in monopolistic competition. Market power is essential to ensure that R&D comes as an intentional investment by private, profit-maximising firms.

 Final output sector which is characterized by perfect competition, uses unskillied labor, human capital and durable goods as inputs.

The outcome of the model is that economic growth is endogenous because it depends on the response of agents to market incentives in production plus consumer optimization.

LUCAS MODEL: A HUMAN CAPITAL

This means that the incentives to trainibg are greater and so will be the growth rate of the economy.

 The lower is the rate of ‘impatience’, that is the less consumers privileged present relative to future consumption, the more will workers be willing to forsake present consumption to dedicate themselves to training. Therefore, the higher will be the rate of economic growth.

The Solow-swan neoclassical growth model explains the long run growth rate of output

ENDOGENOUS GROWTH THEORY NEOCLASSICAL GROWTH THEORY

Steady state growth rate is determined endogenously Steady state growth rate is determined exogenously

It assumes that public and private investment in human capital generate external economies and productivity improvements that offsets the natural tendency for diminishing returns It assumes diminishing marginal returns to capital investment, permitting increasing returns to scale in aggregate production, frequently focusing on the role of externalities in determining the rate of return on capital investment