Endogenous Growth Model / AK

In Solow’s Model, $\underset{\text{endogenous}}{Y}=\underset{\text{exogenous}}{A}f(K,l)$

Here,

$$Y=\underset{\text{endogenous}}{A}f(k,L)$$

where, $A=\varphi (k,I,T,R\&D)$, which is depending on man-made effort such as Innovation, Technology, R&D, Knowledge

The $AK$-model¹, which is the new growth model is written in 1980s by Paul Grover, Lucas et al.

• This got developed as a response to the criticism of the Neo-classical Growth Model (Solow’s Model).
• The policy measures can have an impact on the long run growth rate of an economy. e.g.: Subsidies on R&D / Education can increase the growth rate to innovation.
• This theory believes that improvement in productivity can be linked to a faster pace of innovation and extra investment in Human capital.
• This model stresses the need for government and private sector investments in setting up of institutions and markets which nurture innovation and provide incentives to be innovative.²
• Knowledge $K$, is a major determinant of economic growth.
• Knowledge spillover³ is very important.

Thus economic growth happens due to endogenous fo[^4]rces and not exogenous forces.

Footnotes

1. $A$ is technical progress, $K$ is knowledge ↩

2. Examples: SaiGC ↩

3. In a positive sense, its effect on other things ↩