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 http://www.economist.com/node/6943519?story_id=6943519
- 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?
References
- Boltho and Toniolo (1999, Table 1)
- United Nations: Human Development index http://hdr.undp.org/en/humandev/
- Sloman Eocnomics
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