What is meant by endogenous growth ? Briefly discuss any one of the endogenous growth models(250 words)

Endogenous growth refers to a class of economic theories that explain long-term economic growth as a result of factors and processes that originate within the economy, rather than from external (exogenous) influences. Unlike the neoclassical growth models (such as the Solow model), which treat technological progress as an external force, endogenous growth theory argues that investments in human capital, innovation, research and development (R&D), and knowledge are key drivers of sustained economic growth and are themselves influenced by economic incentives and policy decisions124.

Endogenous growth theory highlights several important mechanisms:

• Human capital formation: Education and skill development increase worker productivity and drive innovation.
• Innovation and R&D: Firms and individuals invest in research, creating new technologies and improving processes, which lead to increasing returns to scale and sustained growth.
• Government policy: Policies that support education, R&D, infrastructure, and protection of intellectual property can enhance growth rates by encouraging innovation and entrepreneurship145.

Paul Romer’s Endogenous Growth Model (1986)

One of the most influential endogenous growth models is Paul Romer’s 1986 model. Romer’s model places technological change at the center of economic growth and explains it as an outcome of purposeful investment in knowledge creation. In his framework:

• The economy is divided into two sectors: a goods-producing sector and a knowledge (R&D) sector.
• Firms invest resources in R&D to create new ideas, which are non-rivalrous and can be used by many without being depleted.
• The production function incorporates knowledge as a factor, and the accumulation of knowledge leads to increasing returns to scale at the aggregate level, allowing for sustained growth even without exogenous technological progress68.

The growth rate in Romer’s model depends on factors such as the productivity of R&D, the share of resources devoted to knowledge creation, and the size of the labor force engaged in innovation. Government policies that encourage R&D, education, and the protection of intellectual property can therefore directly influence the long-run growth rate145.

Implication: Endogenous growth models show that economic policy and incentives matter for long-term growth, and that economies can sustain growth through deliberate investments in knowledge and innovation, rather than relying solely on external technological advances.

(For further reading, refer to IGNOU’s eGyanKosh, Block 4, Unit 14: Endogenous Growth Models.)

References:

1. https://www.investopedia.com/terms/e/endogenousgrowththeory.asp
2. https://en.wikipedia.org/wiki/Endogenous_growth_theory
3. https://corporatefinanceinstitute.com/resources/economics/endogenous-growth-theory/
4. https://testbook.com/ugc-net-economics/endogenous-growth-theory
5. https://jncollegeonline.co.in/attendence/classnotes/files/1625464433.pdf
6. https://www.reed.edu/economics/parker/314/notes/Endogenous.pdf
7. https://www.investopedia.com/terms/e/endogenous-growth.asp
8. https://www-leland.stanford.edu/~chadj/RomerNobel.pdf