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Endogenous growth theory
In neoclassical growth models, the longrun rate of growth is exogenously determined by
assuming a savings rate (the Solow model) or a rate of technical progress. This does not
explain the origin of growth, which makes the neoclassical model appear very unrealistic.
Endogenous growth theorists see this as an oversimplification.
Households are assumed to maximize utility subject to budget constraints while firms
maximize profits. Crucial importance is usually given to the production of new technologies
and human capital. The engine for growth can be as simple as a constant return to scale
production function (the AK model) or more complicated set ups with spillover effects,
increasing numbers of goods, increasing qualities, etc.
Endogenous growth theory demonstrates that policy measures can have an impact on the
longrun growth rate of an economy. In contrast, with the Solow model only a change in the
savings rate could generate growth. Subsidies on research and development or education
increase the growth rate in some endogenous growth theory models by increasing the
incentive to innovate.
Often endogenous growth theory assumes constant marginal product of capital at the
aggregate level, or at least that the limit of the marginal product of capital does not tend
towards zero. This does not imply that larger firms will be more productive than small ones,
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This note was uploaded on 03/31/2010 for the course ECONOMICS 322 taught by Professor H during the Spring '08 term at Kadir Has Üniversitesi.
 Spring '08
 h

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