Question

Explain why there is no convergence in the Human Capital (Endogenous Growth) model

Answer 1

ANSWER:

Human capital denotes the skills and knowledge that accumulate over time in individuals, the labor force, and society. Both physical and human capital are important inputs into the production process. Like physical capital (buildings and machinery), human capital is durable. Skills that you learn at college or during work remain with you.

• However, human capital also suffers from depreciation.  I
• Many skills make up human capital—ranging from learning accumulated at school, to skills learned in the workplace, and to shared social knowledge and conventions. Levels of human capital differ widely across countries ,which helps to explain many growth anomalies.
• For instance, real GDP per capita differs greatly between the United States and India, as does the capital stock. If the output differences were due only to differences in physical capital, it would imply that MPK in India was 58 times higher than in the United States due to the low level of the Indian capital stock.1 If the MPK really was so high in India, then U.S. firms would be investing heavily there.
• However, we do not see such large levels of investment, which suggests that the return to capital in India is not much different from that in the United States.
• Endogenous means something that is explained within the context of a model or theory. For instance, the weather forecast may explain an impending rainstorm by the presence of a low pressure zone moving over a country.
• In this case the forecast makes the rainstorm an endogenous variable and explains it via the low pressure zone. However, the forecast does not explain the presence of the low pressure zone itself, that it is an exogenous variable within the context of the forecast.
• Science moves forward by first making phenomena exogenous, working through the implications of those exogenous forces, and then trying to create fuller theories to explain things that are initially just taken to be exogenous
• There are, of course, many ways of explaining economic growth, and endogenous growth theory refers to a wide range of models. In general, endogenous growth theories try to explain continual economic growth in two ways.4 One is to rule out the notion of a steady state—without a steady state, the economy can continue to grow without limit. The other route (which can be combined with ruling out a steady state) is to explain what produces technological progress and how it changes over time.

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