Endogenous Versus Exogenous Growth Theories - Compare and Contrast Essay

Introduction

Endogenous growth theory holds that investments of human capital, innovation and knowledge is significant to the economic growth, while the exogenous growth theory indicates that the financial progress arises due to the impact outside the economy.

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Moreover, according to Howitt (2010), the endogenous growth is a long run monetary progress at a degree regulated by the internal influences in the financial scheme, in particular, the drives that manage the incentives and the opportunities to generate the technological knowledge. Calculated by the growth rate of the output per person, the intensity of the economic growth, which is determined by the degree of the technical process, depends on the growth level of the total factor productivity (TFP). Furthermore, the neoclassical growth theory presumes that a systematic process determines the rate of technological advancement, which is independent of, and separate from the economic forces. According to the exogenous concept, the economists can take the long-run growth rate as a given exogenous from outside the monetary system. In contrast to the neoclassical opinion, the endogenous view recommends conduits through which the financial aspects can prompt the long-term economic growth and the level of the technological process. The technological development involves the new products, procedures, and the markets that are in the form of innovations.

The AK Theory Model

The long-run growth amount of an economy is influenced by its saving frequency that is according to the AK theory. To illustrate, if s is the fixed rate of the output saved, and 8 is the fixed rate of depreciation, the rate of the aggregate investment is:

d K = sy-8K

d t

Which implies that (1) gives the growth rate

8= 1dY =1 dK-sA-8

Y d t Kdt

Thus, an increase in the saving rate s will lead to an increased growth rate (Bal, & Nijkamp, 2006).

The Solow Growth Model

The Solow growth model is an exogenous growth model that investigates the association between the development in the capital investment economy, total production, and the labor force. Furthermore, to some extent, the exogenous growth model can be observed as a generated case of an endogenous growth description. The firms produce a homogenous good in one sector of the Solow growth model, and all the organizations in the model are functioning in a competitive output and input market. Furthermore, the corporations are identical and act rationally, where J represents the total number of the organizations, and their objective function is presumed to have the following form:

II j = MAX p ll j (t) e-pt d t

Where p is the discount factor equal to all the businesses, II the profit at time t, and where II j denotes the aggregate turnover of the company j over time.

Of equal importance, conferring to Brayan (2013), the uncertainty in the government policies has improved to a level where the search for opportunities and economic planning is inexplicable, even for the most skillful in the business encounters. The lack of new business formation has led to great extents of underemployment, and employment in the European Union and in the United States. During the refutation, lower-wage occupations with an average earning of $ 7.69 to $ 13.23, accounted for 21% job losses. The policy uncertainty has taken a toll from the traditional wage occupation to the college alumnae as well. The college graduates were managing jobs that did not necessitate a university gradation that is according to a research conducted by the Centre for Labor Markets Studies at Northern University. Further, the middle-class aspirations in America have declined because of the challenging economic conditions. The high taxes and the anti-competitive technical standards imposed by the government, inhibit the ability of the small businesses, and the entrepreneur to compete in the export market. Industrialists are obliged to navigate to several federal agencies to obtain licensees because of the complex domestic rules regulating the international industry. Moreover, with limited resources, the small organizations and the entrepreneurs depend on the free trade agreements to traverse the difficulties of the global commerce (Brayan, 2013). Besides, the partisan circles of power and the increased lobbying in Washington have an opposing effect on the businessperson. When the regulatory issues confront the industrialists, they are unable to mount up a viable defense since they have inadequate financial resources available to the larger entities. Moreover, the non-innovative rent-seeking activities waste the entrepreneurs' time and resources when the need for lobbying upsurges. In the 2012 cycle, 1.1 billion was spent because of the outside monetary effect. The sluggish job growth that America is experiencing is because of the growing and the outsized influence of the larger firms, given that an estimated 50% of the entire new jobs produced in the U.S. are from the small businesses. Entrepreneurship is significant because it can transfer new knowledge into commercial applications; therefore, it is vital to a society's long-term growth.

Conclusion

To conclude, endogenous growth is a long run economic development that is defined by the internal forces in the financial structure. Exogenous theory presumes that a systematic process determines the level of the technological procedure with influences outside the economy. Uncertainty in the government policies has led to an increased rate of underemployment and employment in the European Union and America.

References

Bal, & Nijkamp. (2006). Exogenous and endogenous spatial growth models. Retrieved from https://research.vuni/files/2202337/12393.pdf.

Brayan, J. (2013). The impact of the government policy on economic growth. Retrieved from V.C.bridgew.edu/cgi/viewcontext.cgi/article=1022 & context= management_fac

Howitt, P. (2010). Endogenous growth theory. Retrieved from https://link.springer.com/chapter/10.1057/9780230280823_10