Chapter 7: Endogenous Growth

1

• Chapter 7 Endogenous Growth
• Endogenous growth growth in per capita output
  depends on the economic decisions in the model
• Government policy and economic growth

2

• Endogenous Growth
• A basic Endogenous growth model Yt z Kt
• where z is the constant MPK
• There is no technology growth and no population
  growth
• u b 0
• S is the savings rate (which is constant)
• Investment equals total saving in equilibrium
• It S Yt S z Kt
• The capital stock evolves over time following
• Kt1 (1- d Sz) Kt

3

• Which gives the capital stock growth rate of
• Output Growth is the same
• C and I grow at the same rate
• For positive growth the MPK multiplied by the
  savings rate must be greater than depreciation
• Exogenous versus Endogenous growth
• In Endogenous growth model ? MPK (z) or ? S ? ?
  in growth rate of all variables

4

• Model produces perpetual growth
• Economic factors have growth effects
• Key message of Endogenous growth model MPK is
  not diminishing, living standards can rise
  indefinitely without exogenous changes in
  technology
• Key message of Solow model continued increases
  in standard of living occur only with
  technological change (since we have a diminishing
  MPK)

5

• Does a non-diminishing MPK makes sense?
• In endogenous growth models we define capital as
  physical and human capital- so constant MPK makes
  sense
• Human Capital stock of knowledge no diminishing
  MPK
• Learning by doing When we work in a factory we
  devise better ways to utilize the same capital
  stock
• A model with human capital

6

• Can government policies affect economic growth?
• Generally ineffective in Solow model
• Can have large impact in endogenous growth model
• Ex Policies to Change the Savings Rate
• Taxes on savings, Short-sightedness could lead to
  a savings rate that is too low
• A government policy change might change savings
  (example introducing retirement accounts)

7

• In the Solow model this leads to a level shift
  in standards of living (one time) while in the
  endogenous growth model increases in standards
  of living continue (growth rate changes)

8

• Government policies to change tech growth
• Legal Environment (Patent Protection)
• Infrastructure (Public Goods)
• Subsidize research and development (ex National
  Science Foundation)
• Subsidize Loans to startups (borrowing
  constraints)
• Encourage Strategic Industries (computer chips)