Case Study Of Endogenous Growth Theory

Amazing Essays
In this case, each firm maximizes profit by paying K and L their marginal products, without offering any additional payment for their contribution to technological progress.
Learning by doing formed the basis of the first model of endogenous growth theory, which is known as the AK model. The AK model assumes that when people accumulate capital, learning by doing generates technological progress that tends to raise the marginal product of capital, thus offsetting the tendency for the marginal product to diminish when technology is unchanged. The model results in a production function of the form Y = AK, in which the marginal product of capital is equal to the constant A. According to Aghion and Howitt (2009), the AK model predicts that a country’s
…show more content…
In the goods sector, it is assumed to have constant returns to scale (similar to Solow-Swan growth model), whereas in the R&D sector, increasing returns to scale obtained (Romer 1986, 1990, 1996). This growth theory also states that output growth is an increasing function of population growth. This implies that positive population growth is necessary for sustained growth of output per worker. According to Jones (1998), higher population increases the number of researchers and more researchers mean more ideas, thus sustaining growth in the model. In this case, growth in ideas is clearly related to the growth in population. Again, people are the key inputs to the creative process. A larger population generates more ideas, and because ideas are non-rivalrous, everyone in the economy …show more content…
Human capital consists of the abilities, skills and knowledge of particular workers. The model of human capital differ from the Solow model by implying that moderate changes in the resources devoted to physical and human capital accumulation may lead to large changes in output per worker. This has been able to account for the potential differences across countries in income (Romer, 1996). Human capital is the main source of growth in several endogenous growth models as well as one of the key extensions of the neoclassical model. Since the term ‘human capital’ refers principally to workers’ acquisition of skills and know-how through education and training, the majority of studies have measured the quality of human capital using proxies related to education (such as, school-enrolment rates). A large number of studies has found evidence suggesting that educated population is a key determinant of economic growth (Barro, 1991; Mankiw et. al., 1992; Barro and Sala-i-Martin, 1995; Brunetti et. al., 1998, Hanushek and Kimko, 2000). However, there have been scholars who have questioned these findings and, consequently, the importance of human capital as substantial determinant of economic growth (e.g. Levine and Renelt, 1992; Benhabib and Spiegel, 1994; Topel, 1999; Krueger and Lindahl, 2001; Pritchett,

Related Documents

  • Decent Essays

    Robert C. Allen says,“Early modern England experienced an ascending spiral of progress in which the rise in the wage induced the invention and use of machines that raised labor productivity. The rise in productivity raised the wage even more and the process continued. The inventions of the industrial revolution were the culmination of a century and a half of economic growth.” This spiral of productivity caused a rise in wage, which caused more use of textile inventions and helped the economy. Textile inventions were part of a century and a half of economic growth in England. Textile inventions continued to help the growing economy of Britain.…

    • 916 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    “A multiplier effect is a shift in the aggregate demand that results when expansionary fiscal policy, increasing income and thereby increase consumer spending”. As the workers earn higher wages the firms also notice higher earnings. The higher demand of spending means higher demand for supplies. For example sense the firms are making more money they need to hire more employees to make more supplies to equal the demand for the product. “The multiplier is an important part concept in macroeconomics because it shows how the economy can amplify the changes of spending Pg410”.…

    • 765 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    And investments in businesses, technologies, and education are huge growth factors. Second, economic growth is affected by the growth in technology. As technology develops and advances, there is an increase in the amount of productivity. So the greater the technology advancements, the more labor will be able to be accomplished. The new growth theory states, “when the rewards are greater, more technological advances will occur” (Miller, R.).…

    • 726 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    When government spending occurs employment tends to increase. This is because as producers respond to government demand production from firms increase; leading to a requirement of more labour. This effect is multiplied as those newly employed start spending money their wages and therefore more demand is created and therefore producers respond by providing more goods and services leading to a multiplying cycle. Regarding the price level of the macroeconomic policy we can determine that due to the government spending an increase in the aggregate demand occurs which increases the price of the goods and services sold. See Figure…

    • 1576 Words
    • 7 Pages
    Decent Essays
  • Decent Essays

    This develops a dependency on others to accomplish their jobs in order to accomplish one’s own job. Even with that side-effect division of labor is important in a capitalistic economy where the population continues to expand rapidly. The greater the population is the higher their demand for products and resources are. This is beneficial for a capitalist economy because it will encourage market…

    • 1405 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Self-interest drives a society to become a Commercial Society, which, according to Smith, is rooted in human nature. Through the division of labor, laborers will be able to drastically increase their productions, stimulating the growth of the economy. A growing economy is parallel to growth in capitals, therefore the overall wellness of the nation. Under Capitalism, self-interest, as part of human nature, signifies self-improvement. By reinvesting capital, the overall capital of the nation will grow and therefore increasing the wages of the workers.…

    • 852 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Grow. More customers, more sales, positive cash flow, larger deal sizes, higher volume, more billable hours, justication for higher prices, ect. Why business are looking growth? Because if they are not growing they are shrinking. People are in business to build or create something bigger than themselves.…

    • 1825 Words
    • 8 Pages
    Decent Essays
  • Decent Essays

    The modern industry was able to keep up the rapidly increasing demands. When this happened the industrial middle class was replaced by the modern bourgeoisie. These modern bourgeoisie were the leaders of the working industries and were also considered industrial millionaires. The modern industry established the world market. When America was discovered it made the development of land communication, commerce, and navigation rapidly increase.…

    • 1271 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Except creating new travel patterns for people, developed infrastructure increases operational opportunities for firms (Banister D., Berechman J., 1999). There are for example products that have to be transported within few hours and be available at certain radius. Providing firms with new transport options help them to expand and ensure their output is vastly available on the commercial market. Improved infrastructure increases potential output of the factory and makes production more affordable. This reflects on the country’s GDP level.…

    • 1201 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    Labour Force Case Study

    • 1512 Words
    • 6 Pages

    More people leads to more labour which then leads to more people to produce goods. More labour supply also affects wages. Since there is more competition to get a job, companies can drive wages down. An increase in labour also increases potential GDP because ‘full employment’ consists of more people. Free tertiary education One can assume free tertiary education causes more people to take higher education.…

    • 1512 Words
    • 6 Pages
    Decent Essays