growth models

Bring out the differences and similarities between endogenous growth models and exogenous growth models.


Table 1

Exogenous Endogenous
Assumptions Diminishing marginal returns on investments Increasing marginal returns on capital investments
Constant returns to scale/DRS? Increasing returns to scale in aggregate production
Focus on externalities in determining the rate of return on investments
Source of growth Growth in Capital labour ratio due to savings and investment Increasing returns are a source of growth, apart from technology, public and private investments in human capital, external economies and productivity improvements.
Eqn Y=AK
Long term growth Growth tapers off in the long run Since there are no diminishing returns to capital, possibility exists that investments in physical and human capital can generate external economies and productivity that are enough to offset diminishing returns. The net result is sustained long term growth.
Convergence Proposes convergence No tendency for convergence. A temporary or prolonged recession in one country can lead to a permanent increase in the income gap between itself and wealthier countries
International flow of capital Int flow of capital because of higher returns in developing countries. This leads to convergence International flow of capital accentuates wealth disparity between developed and developing countries. Though return on investment in developing country may be high, complementary investments in human capital, infrastructure, or R&D are low.
Technological change Do not explain technological change. Its exogenous. Explain technological change as an endogenous outcome of public and private investments in human capital and knowledge intensive industries.



  • Both emphasise the importance of savings and human capital investments for achieving rapid growht


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