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Exogenous Growth: Definition, Economic Theory, Vs. Endogenous
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What Is Exogenous Growth?
- Exogenous growth, a key tenet of neoclassical economic theory, states that economic growth is fueled by technological progress independent of economic forces.
Key Takeaways
- The exogenous growth model factors in production, diminishing returns of capital, savings rates, and technological variables to determine economic growth.
- Both the exogenous and endogenous growth models stress the role of technological progress in achieving sustained economic growth.
- The endogenous growth model differs from the exogenous growth model in that it suggests that forces within the economic system result in creating the atmosphere for technological progress.
Understanding Exogenous Growth
The exogenous growth theory states that economic growth arises due to influences outside the economy. The underlying assumption is that economic prosperity is primarily determined by external, independent factors as opposed to internal, interdependent factors.
From a broad economic sense, the concept of exogenous growth grew out of the neoclassical growth model . The exogenous growth model factors in production, diminishing returns of capital , savings rates, and technological variables to determine economic growth.
Exogenous Growth vs. Endogenous Growth
The exogenous growth and endogenous growth theories are part of the neoclassical growth models. Both models stress the role of technological progress in achieving sustained economic growth. However, the former posits that technological progress alone, outside of the economic system, is the key determinant in maximizing productivity , whereas the latter suggests that an economy's long-term growth is a byproduct of the activities within that economic system that result in technological progress.
Exogenous (external) growth factors include things such as the rate of technological advancement or the savings rate . Endogenous (internal) growth factors, meanwhile, would be capital investment, policy decisions, and an expanding workforce population. These factors are modeled by the Solow model , the Ramsey model, and the Harrod-Domar model.
To sum up these models, given a fixed amount of labor and static technology, economic growth will cease at some point as ongoing production reaches a state of equilibrium based on internal demand factors. Once this equilibrium is reached, exogenous factors are then needed to stoke growth.
:max_bytes(150000):strip_icc():format(webp)/GettyImages-1135680769-a92318e1c56c48e583a861106161ae51.jpg "exogenous growth model hypothesis")
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Exogenous and Endogenous Growth Models: a Critical Review
Comparative Economic Research
The main divisions of the theoretical economic growth literature that we study today include exogenous and endogenous growth models that have transitioned through a number of notions and criticisms. Proponents of exogenous growth models argue that technological progress is the key determinant of long-run economic growth as well as international productivity differences. Within the endogenous growth models, there are two notions that are propagated. The first postulates that capital used for innovative purposes can exhibit increasing returns to scale and thus account for the international productivity differences we observe today. The key determinants include knowledge, human capital, and research and development. The second argues that factors that affect the efficiency of capital, and hence cause capital flight, can also explain international productivity differences. These factors that affect the efficiency of capital include government spending, inflation, real exchange rates, an...
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Policy Implications of Endogenous Growth Models
Cite this chapter.
- Jarig van Sinderen &
- Theo J. A. Roelandt
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Up to the mid-eighties in traditional macroeconomic neoclassical growth theory exogenous technological development was presupposed. It was assumed that economic actors behaviour barely influenced technological renewal. Classical growth theory treated technology like manna from heaven, positively influencing per capita income growth in countries. The unexplained residual in traditional growth accounting estimates was attributed to exogenous technological progress. In other words, a statistical ‘measure of our ignorance,’ has been interpreted as an indicator of the impact of technology on growth. This kind of reasoning leaves little room for an analysis of the question how firms’ strategic behaviour as well as government intervention may affect long-run growth through its impact on technological progress apart from exogenously stimulating general technology development. Also the influence of profit motivated R&D within firms could not be explained by this growth theory. From this traditional perspective technology policy primarily concentrates on enhancing competition (competition policy) and on stimulating fundamental scientific research (science policy). The actual measurement of the effectiveness of such policies is quite difficult. As a consequence, in economic theory the role of the government was underestimated. In this traditional view the influence of investment in fysical and technological infrastructure on growth is absent.
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van Sinderen, J., Roelandt, T.J.A. (1998). Policy Implications of Endogenous Growth Models. In: Brakman, S., van Ees, H., Kuipers, S.K. (eds) Market Behaviour and Macroeconomic Modelling. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-26732-3_13
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IMAGES
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Exogenous growth is the belief that economic growth arises due to influences outside the economy or company of interest. Exogenous growth assumes that economic prosperity is primarily determined ...
The Solow-Swan model or exogenous growth model is an economic model of long-run economic growth.It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largely driven by technological progress.At its core, it is an aggregate production function, often specified to be of Cobb-Douglas type, which enables ...
Solow's (1956) Exogenous Economic Growth Model In 1956, R obert Solow devel oped an alter native economic growth model to addre ss the weaknesses of the Domar g rowth proposition.
The Exogenous Growth Theory lies in contrast to the endogenous growth theory, which holds that internal forces are more important than external forces in determining the rate of economic growth. ... Guidelines CFI's free Financial Modeling Guidelines is a thorough and complete resource covering model design, model building blocks, and common ...
per is discussed as follows; Section 2 reviews exogenous growth theories and their criticisms. Section 3 examines the endogenous growth theories and their criticisms. Lastly, section 4 provides a summary and concluding remarks. 2. Exogenous theories of economic growth 2.1. The Domar (1946) Multiplier‑Effect Economic Growth Model
1. Introduction and basic concepts. The dynamical behavior of long-run economic growth was modeled using mathematical tools, and the model was called the Solow-Swan model, also an exogenous growth model [1], [2], [3].The model was introduced with the aim to replicate the dynamic of long-run economic growth by regarding the capital accumulation, the labor or the population growth and ...
The Neoclassical Theory Exogenous Growth Model. Contrary to the Malthusian theory that has investigated the relation between population and production prior to the demographic transition, neoclassical growth models focused largely on the growth process during the Modern Growth phase. Far from being limited to agricultural productivity ...
Abstract. The main divisions of the theoretical economic growth literature that we study today include exogenous and endogenous growth models that have transitioned through a number of notions and criticisms. Proponents of exogenous growth models argue that technological progress is the key determinant of long‑run economic growth as well as ...
The strength of the Solow growth model, unlike the Domar model, depends on its Exogenous and Endogenous Growth Models: a Critical Review 69 convergence whenever there is an external shock. Solow argues that shifts in the production function caused by increases (or decreases) in the rates of savings, population growth and technological progress ...
Abstract The main divisions of the theoretical economic growth literature that we study today include exogenous and endogenous growth models that have transitioned through a number of notions and criticisms. Proponents of exogenous growth models argue that technological progress is the key determinant of long-run economic growth as well as international productivity differences. Within the ...
The Exogenous Economic Theory is a neoclassical economic theory focusing on external or exogenous factors as the primary contributors to economic growth. This theory suggests that exogenous factors like technological progress, government policies, and well-functioning institutions drive economic growth. It recognizes that government policies ...
Solow Growth Model Households and Production Review De-nitionLet K be an integer. The function g : RK+2!R is homogeneous of degree m in x 2R and y 2R if and only if g (lx,ly,z) = lmg (x,y,z) for all l 2R+ and z 2RK.Theorem (Euler™s Theorem) Suppose that g : RK+2!R is continuously di⁄erentiable in x 2R and y 2R, with partial derivatives denoted by g
2.4 — Exogenous Growth Theory ECON 317 • Economic Development • Fall 2021 Ryan Safner ... 1956, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics 70(1): 65-94 The Solow (N eoclassical) Growth Model. The "Simple" Solow Model : Key Assumptions An aggregate Cobb-Douglas production fu nction Diminishing ...
8. Note that we are not specifying the 'type of convergence'. Some authors use the neoclassical model to defend the hypothesis of absolute convergence. However, absolute convergence only takes place in the neoclassical model if the exogenous parameters, such as population growth rate, savings and technology, are identical among economies.
5 Commonly referred to as the endogenous growth theory. Although both the exogenous and endogenous growth theories argue that capital accumulation or formation is an important determinant of economic growth, they differ in their treatment of technological progress. The former treats technological progress as exogenous to the model; while the ...
equilibrium growth path. Accumulation of capital in exogenous growth theory is a vehicle for ongoing technical development. Neoclassical theory gives no economic explanation for such development, but instead includes a time trend (usually representing technical progress) in the model for the long-run rate of economic growth.
The modern growth theory began with the first wave represented by the Solow-Swan model, the Ramsey model, and the Diamond overlapping-generation model over 20 years (1950-1960). Though the Ramsey model is considered the starting point, the most significant contribution to this generation, even the modern growth theory, perhaps, belongs to the ...
The exogenous growth theory supposes the external channel of the economic structure. ... spotlight on the association between ICT and income growth from two dissimilar points of views such as endogenous growth model and exogenous growth theory. In both of these cases, technological alteration is very crucial for economic development ...
II. The Orthodox Neoclassical Model of Purely Exogeneous Growth Neoclassical growth theory has many significant predecessors. These include the "classical" growth theories of Smith, Ricardo, Malthus, Marx, etc. (see Harris, 1987). There are also the "Keynesian" growth models of Harrod (1939) and Domar (1946).4 Tobin's (1955) paper was a
The neoclassical growth theory as pioneered by Solow (1956, 1957) and Abramovitz (), employing an aggregate production function framework, gave a large role to exogenous technical change.The contribution of exogenous technical change, which offsets the law of diminishing returns, is obtained as a residual in growth accounting exercises.
the endogenous balanced growth rate (θ) is determined in the endogenous growth model by the KE and KR loci jointly, where under constant returns, c, k and y all grow at this common rate θ 2. The AK Model: Rebelo (1988) Production function: y = f(k) = Ak. Endogenous growth rate: A ( ) 0.
They favored a model that replaced the exogenous growth variable (unexplained technical progress) with a model in which the key determinants of growth were explicit in the model. ... Versus exogenous growth theory. In neo-classical growth models, the long-run rate of growth is exogenously determined by either the savings rate (the Harrod ...
Up to the mid-eighties in traditional macroeconomic neoclassical growth theory exogenous technological development was presupposed. It was assumed that economic actors behaviour barely influenced technological renewal. ... Bann, R.J. (1990), "Government Spending in a Simple Model of Economic Growth," Journal of Political Economy, 98, part 2 ...
Examples of Endogenous Growth Models. 1. Arrow Model. Also known as the AK model of economic growth, the arrow model is used to explain economic changes as a result of innovation and technology. The "learning by doing" model is also used in the arrow model to explain how self-practice and innovation result in productivity and improved human ...