Exogenous Economic Growth Model

An Exogenous Economic Growth Model is an economic growth model that explains economic growth based on external factors, not determined by the system itself, such as technological progress or population growth.

• Context:
  • It can (typically) explain economic growth by attributing it to external influences like technology and population growth.
  • It can (often) be contrasted with an Endogenous Growth Model, which explains growth as a result of internal processes.
  • It can range from being a Basic Exogenous Growth Model to being a Complex Exogenous Growth Model.
  • It can be foundational in macroeconomics and economic theory discussions.
  • ...
• Example(s):
  • a Solow-Swan Model that focuses on ...
  • One that accounts for technological advancements to illustrate how external improvements drive growth.
  • One that accounts for demographic changes as a key factor in influencing economic outcomes.
  • One that incorporates exogenous changes in energy prices (e.g. oil shocks) as a driver of economic fluctuations and long-run growth paths.
  • One that includes exogenous government policies like tax rates, subsidies, or regulations as key influences on economic growth.
  • One featuring exogenous natural resource discoveries (e.g. major oil field finds) that significantly boost an economy's productive capacity and growth.
  • One with exogenous weather shocks or natural disasters that destroy capital stock and disrupt economic activity, affecting short-run output and long-run growth potential.
  • One that incorporates exogenous geopolitical events like wars, revolutions, or trade agreements that radically reshape an economy's productive structure and growth dynamics from the outside.
  • ...
• Counter-Example(s):
  • Endogenous Growth Models, which explain growth through internal factors like human capital and innovation.
• See: Economic Growth, Endogenous Growth Model, Solow-Swan Model.

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References

2024

• Perplexity
  • An Exogenous Economic Growth Model is an economic growth model that explains long-term economic growth primarily through factors that are external or exogenous to the model itself. The key points about Exogenous Growth Models are:
  • Exogenous Factors Drive Growth
    • Economic growth is driven by factors outside the model, such as technological progress, population growth, and capital accumulation.
    • These exogenous factors are not explained within the model itself, but are taken as given from outside.
  • Technological Progress is Key
    • Technological progress, which increases productivity, is considered the main exogenous driver of long-run economic growth in these models.
    • Technological change is assumed to occur automatically, independent of economic decisions or incentives within the model.
  • Diminishing Returns to Capital
    • The models assume that capital accumulation is subject to diminishing returns. As more capital is accumulated, the marginal returns from additional capital decrease.
    • This implies that capital accumulation alone cannot sustain long-run growth. Continued growth requires exogenous technological progress to offset diminishing returns.
  • Steady-State Growth Path
    • In the long run, these models predict economies will converge to a steady-state growth path where output per capita grows at the rate of exogenous technological progress.
    • The steady-state capital-labor ratio and output per worker depend on exogenous parameters like the savings rate, population growth rate, and depreciation rate.
  • The Solow-Swan model developed independently by Robert Solow and Trevor Swan in 1956 is a famous example of an Exogenous Growth Model. It contrasts with Endogenous Growth Models that explain technological progress and growth through factors internal to the model.
  • Citations:

[1] https://www.wallstreetmojo.com/exogenous-growth-theory/
[2] https://doaj.org/article/3ba7b2548e88427eb987dc3b4a476718
[3] https://corporatefinanceinstitute.com/resources/economics/exogenous-growth-theory/
[4] https://gala.gre.ac.uk/id/eprint/14665/1/GPERC37_MU.pdf
[5] https://repository.up.ac.za/bitstream/handle/2263/23183/03chapter3.pdf?isAllowed=y&sequence=4
[6] https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model
[7] https://www.econstor.eu/bitstream/10419/259181/1/1047456419.pdf
[8] https://corporatefinanceinstitute.com/resources/economics/solow-growth-model/
[9] https://www.investopedia.com/terms/n/new-growth-theory.asp
[10] https://economics.stackexchange.com/questions/58199/defining-endogenous-vs-exogenous-in-laymans-terms

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