What Is Exogenous Growth?
Let me explain exogenous growth to you directly: it's a fundamental idea in neoclassical economic theory that says economic growth comes from technological progress that's independent of the economy's internal forces.
Key Takeaways
- Exogenous growth, a key tenet of neoclassical economic theory, states that economic growth is fueled by technological progress independent of economic forces.
- The exogenous growth model factors in production, diminishing returns of capital, savings rates, and technological variables to determine economic growth.
- Both the exogenous and endogenous growth models stress the role of technological progress in achieving sustained economic growth.
- The endogenous growth model differs from the exogenous growth model in that it suggests that forces within the economic system result in creating the atmosphere for technological progress.
Understanding Exogenous Growth
You need to grasp that exogenous growth theory claims economic growth happens because of influences outside the economy. The core assumption here is that prosperity is mainly shaped by external, independent factors, not internal ones that depend on each other.
In a broader economic view, this concept emerged from the neoclassical growth model. I factor in production, diminishing returns of capital, savings rates, and technological variables when using the exogenous growth model to figure out economic growth.
Exogenous Growth vs. Endogenous Growth
Both exogenous and endogenous growth theories fall under neoclassical growth models. They both highlight technological progress as crucial for sustained economic growth. But here's the difference: the exogenous one argues that technological progress by itself, outside the economic system, is the main driver for maximizing productivity. In contrast, the endogenous model says long-term growth comes from activities inside the economic system that lead to technological progress.
Exogenous factors include things like the rate of technological advancement or the savings rate. Endogenous factors, on the other hand, involve capital investment, policy decisions, and a growing workforce population. These are captured in models like the Solow model, the Ramsey model, and the Harrod-Domar model.
To wrap this up, if you have a fixed amount of labor and unchanging technology, economic growth will eventually stop as production hits an equilibrium based on internal demand. Once you reach that point, exogenous factors are what you need to spark growth again.
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