Comparison of Endogenous Growth Model and Neo Classical Growth Model

Compare The Endogenous Growth Model
and The Neo Classical Growth Model
Highlighting the Three Factors That
Distinguish the Model Under Your
Analysis
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Table of Contents
INTRODUCTION...........................................................................................................................3
1.1 Solow's Neoclassical Model:.....................................................................................................3
1.2 Endogenous Growth Model.......................................................................................................6
1.3 Background to the Growth Model.............................................................................................9
1.4 Comparison................................................................................................................................9
(I) Increasing return to capital investment Vs decreasing return to capital investment.........9
(II) Increasing return to scale Vs Constant return to scale...................................................10
(III) Externality Effects:.......................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12
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INTRODUCTION
Economic development refers as the improvement in the living standard of the
individuals resides in nation along with their per capita income. It is also judged from the
determinant related to improvement in life quality. There are many others aspects which are
considered in ascertaining economic development of a nation includes infrastructure, overall
income, FDI, flow of cash etc. The importance of acknowledging this information in relation to
mentioned concept is main because further aid in development of strategies and acceptance of
criterion that contributes in development within positive direction. The main role is on the hand
of government regarding economy development of a nation. It is the long term process that
requires stable policies and models that help in development of consistent working culture.
Application of such models in process of developing strong economy is main as these include
trusted strategies and working principles in consideration to different conditions. The two main
theories covered in this report for analysis are named as endogenous growth model and the
neoclassical growth model. The main objective of this report is to analyse the role played by
these models in economic development of Egypt (Acemoglu, 2012).
The aspects covered in report includes generic description of both models using graphs
and important concepts, presentation of information from own understanding about contribution
of these models towards understanding the economic development of Egypt and comparison by
considering three different factors to distinguish properly in between the two models.
1.1 Solow's Neoclassical Model:
Solow's Neoclassical Model is considering as a type of economy theory that defines how
a dependable economic growth rate outputs from a better combination of 2 driving forces i.e.
technology, capital and labour. Robert Solow and Denison have endeavoured to analyse the
relative significance of the different economic growth sources by following phenomenal of
production function.
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Figure 1Solow's Neoclassical Model
There is huge contribution of this theory in understanding the contribution of different
number of factors that help in determination of rate of economic growth in relation to the
different nations. The aspect of growth is refers as adding more capital, labour inputs, idea and
technology for further performance of work in more enhanced manner. There are many basic
points upon which this model defines the aspect of economic growth. The different determinants
in relation to same are defined below:
 The model has belief that temporary increase will be seen in growth rate after attaining
sustainable rise in capital investment. The main reason behind occurrence of this situation
will be increased ratio of capital to labour that continually goes up.
 If, ascertained the decline in marginal product of additional units then the economy
moves back towards long term growth path. This will be ascertained in the situation when
the real GDP growing at the same rate as the development ascertained in workforce plus
a factor to reflect improving productivity (Acs, et. al., 2012).
 This models states that steady state of growth path is ascertained in the situation when
capital, output and labour are growing with same rate. This is the situation when output
per worker and capital per worker are constant in nature.
 As per the belief of neoclassical economists that a raise in the trend rate of growth will
gathered in the situation when attained the combined situation related to addition in the
labour supply and a higher level of fruitfulness of labour and capital.
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