Lecture 6
ENDOGENOUS GROWTH MODELS

1. The AK Model

• Production function:
  y(t) = Ak(t)
  where y = per-capita output, k = broad measure of capital stock (physical and human capital)

• Capital accumulation:
  k(t+1) = k(t) + sAk(t)

• Results:
  • Steady-state growth per-capita:
        g = sA

  • Increase in the saving rate leads to higher per-capita growth (Contrast with Solow model!)

  • Countries with identical technologies and saving rates will grow at the same rate, regardless of initial capital-labor ratio (again, look at Solow)

2. Human capital and knowledge

• Spillover effects of human capital accumulation

• In a free market, private agents do not take into account positive externality;
  thus the private optimal amount of human capital is less than the socially optimal level

• Govt policy to subsidize education could potentially increase the growth rate

• Beneficial effects of greater spending on R&D

3. Financial intermediation

• Due to poor financial markets, some savings may be "lost"

• Per-capita investment:
  i(t) = u [ s y(t) ],     0 < u < 1

• Growth rate of per-capita income:
  g = u [ s A ]

• Financial development could lead to higher g (Why?)