Simplified Grasp on Growth Theory

Growth Theory can be categorized into two types i.e. Exogenous Model and Endogenous Model.

Exogenous Model considers external factors to predict the economic growth. For example: Under Solow Model, Solow suggested that without technological progress, economic growth can’t be achieved. The Solow Model identifies the capital level per worker and the effectiveness of labor both as the ability to create permanent growth in the per capita stock per labor of the economy.

Endogenous Model theory states that economics is not an external force rather the primary result of the internal cause of origin. It can simply be defined as investment in human capital, innovation and knowledge contribute to the economic growth. The theory also consists of the summation of positive externalities and spillover effects. The AK model of economic growth is an endogenous growth model used in the theory of economic growth, a subfield of modern macroeconomics. AK model is a special case of Cobb-Douglas function which has constant returns to scale.

The growth of Different Countries

GDP PPP Per Capita IMF 2017

Why Adopt Growth Theory

The economic growth rates of nations are compared using the ratio of the GDP to population or per-capita income. The long-run growth results in a quality of life, increase in trade & business cycle, Income equality & equitable growth. An increase in economic growth caused by the more efficient use of inputs such as labor productivity, physical capital, energy or materials is referred to as intensive growth. GDP growth caused only by increases in the number of inputs available for use is called extensive growth. The main implication is that the endogenous growth models are able to explain economic growth in the long run, whereas the basic Solow growth model is only able to explain the growth towards the steady state.