Limitations of Solow model (cont.) – The model cannot explain the empirical significant relation between saving rates and technological progress

Endogenous (or “new”) growth models

  • Explain where technological change comes from
  • How it can be influenced by behavioural variables
  • Under what conditions growth may continue
  • Assumptions
  • exogenous shock do not occur
  • Expectations are correct
  • Prices and quantities are fully adjusted by perfect competition in final goods and labour markets
  • Monopoly rents for new ideas are possible assumed to be fully protected
  • Labour, capital and technology are the production factors
  • All new ides are used
  • Existing technology promotes production of new ideas (standing on shoulder effect)

Flow chart of a Romer Economy

Limits endogenous growth models

  • Powerful assumptions
  • Un-realistic developments
  • Can ideas be owned? Any empirical considerations?

Questions for discussion To read

  • Explain the effect of (i) an increase in savings ratio (ii) a rise in population growth and (iii) an increase in exogenous technology growth in the neoclassical model. Provide some empirical evidence using appendix 2.2
  • What is the golden rule? Can you think of any country that has broken the golden rule? Provide some evidence from appendix 2.3
  • How can we discuss data in appendix 2.4 from the endogenous growth theory perspective?


  • Boltho and Toniolo (1999, Table 1)
  • United Nations: Human Development index
  • Sloman Eocnomics

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