Development Accounting
- The table above tell us that.
- First, there are surprisingly large difference in the level of productivity, among countries.
- Capture interesting variation in countries relative strengths and weaknesses.
- If there is a deficiency with these productivity measures?
Beyond the Solow Model: Endogenous Growth Theory
The Endogenous Growth Theory rejects
Solow’s basic assumption of exogenous technological change
The Basic Model
Start with a simple production function: Y = AK, where Y is output,
K is the capital stock, and A is a constant measuring the amount of
output produced for each unit of capital (noticing this production
function does not have diminishing returns to capital).
One extra unit of capital produces A extra units of output regardless of how much capital there is. This absence of diminishing returns to capital is the key difference between this endogenous growth model and the Solow model.
Let’s describe capital accumulation with an equation similar to those
we’ve been using: DK = sY – dK. This equation states that the change
in the capital stock (DK) equals investment (sY) minus depreciation
(dK). We combine this equation with the production function, do
some rearranging, and we get: DY/Y = DK/K = sA – d
This equation shows what determines the growth rate of output DY/Y.
Notice that as long as sA > d, the economy’s income grows forever,
even without the assumption of exogenous technological progress.
In the Solow model, saving leads to growth temporarily, but diminishing
returns to capital eventually force the economy to approach a steady
state in which growth depends only on exogenous technological progress.
By contrast, in this endogenous growth model, saving and investment can
lead to persistent growth.
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