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An in-depth analysis of economic growth theory, focusing on the debate between exogenous and endogenous growth. The authors discuss the contributions of harrod and domar, solow, and the neoclassical and endogenous growth theories. The document also explores the impact of public vs. Private ownership on growth and the sources of endogenous growth, including saving, efficiency, and depreciation.
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Economic Growth: The Short Run vs. the Long Run
Time
National economic output
Actual output
Potential output
Business cycles in the short run
Economic growth in the long run
Downswing
Upswing
Thus, increased saving may reduce actual output, while increasing potential output.
Economic Growth: The Short Run vs. the Long Run
Keynesian or neoclassical
Neoclassical or endogenous
g = sE - δ
Economic Growth:
The Solow Model
Economic Growth:
The Solow Model
a y Ak
1
k s
n q y
a
a
a n q
s y A
−
=
1 1
δ
0 dA
dy
⇒
Hence, economic growth in the long run is immune to economic policy, good or bad
“To change the rate of growth of real output per head you have to change the rate of technical progress.”
The Neoclassical Theory of
Exogenous Economic Growth
A Simple Model of
Endogenous Growth
Saving equals investment in equilibrium.
Saving is proportional to income.
Investment involves addition to capital stock.
Output depends on quality and quantity of capital.
a a Y AL K
1
( )
a A = E K / L
Y = EK
g = sE − δ
q = g − n
Now, assume learning by doing :
It follows that
and that
Two equations in two unknowns
g
q
No coincidence that, in East Asia, saving rates of 30- 40% of GDP went along with rapid economic growth. No coincidence either that many African economies with saving rates around 10% of GDP have been stagnant. OECD countries: saving rates of about 20% of GDP
Economic stability with low inflation and positive real interest rates encourages saving, and thus is good for growth.
Sources of Endogenous Growth
Sources of Endogenous
Growth
East Asia
Africa
Income per capita