Question

The primary difference between the neoclassical growth model and endogenous growth models is that

A. the neoclassical growth model assumes that technology is exogenous.

B. all of the above

C. changes in savings rates can affect growth in the long-run in endogenous growth models.

D. endogenous growth models attempt to explain movements in technology within the model.

Answer 1

A. the neoclassical growth model assumes the technology is exogenous.

Traditional neoclassical growth models, which assume exogenous and universal technological progress and diminishing returns to capital accumulation, predict convergence of countries to the same steady-state rate of growth and level of income and capital per person, with initially poor countries catching up but not overtaking the leaders.

By contrast, endogenous growth models, in which productivity growth is the outcome of incentive structures that may differ across countries, entertain the possibility of persistent divergence in growth performance and thus of the overtaking of one country by another or of ever-widening gaps between leaders and followers.

The root of this difference is their treatment of technical change and returns to capital accumulation. The neoclassical treatment of technical change is exogenous, while the endogenous model’s treatment is, well, endogenous