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Endogenous Versus Exogenous Growth Theories

Endogenous and extraneous growth models are significant growth models that are used in explaining how the economy grows. Thus, endogenous growth models focus on how the internal factors rather than external ones cause economic growth. At the same time, exogenous growth explains how economic growth is influenced by external factors. Government policies also play a critical role in influencing long-term economic growth rate. The paper lays a focus on exogenous and endogenous growth, while the role of government policy on long-term economic growth will also be discussed.

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Endogenous Growth

Endogenous growth model is based on the idea that the economic growth in a country is the result of policies, investment capital, and even internal processes. This ideology started in the 1980s, and it was put in place as a criticism to the notion that exogenous growth led to economic growth. The proponents of endogenous growth support their claims by pointing out to the human capital as well as innovation as are the main elements that are needed to enhance growth (Andolfatto, 2008). Thus, supporters of this model justify their argument by pointing out the differences in growth between regions, which have invested in technology and innovation, and areas that are not industrialized.

At the same time, areas, which have experienced significant technological changes, have a significant economic growth when compared to other regions (Andolfatto, 2008). Other essential elements that are a prerequisite for growth are policies, such as subsidies as well as support for research and development, since these factors tend to support innovation needed to support growth. While policies that support openness and innovation are critical to economic development, policies that do not foster innovations or changes delay economic progress significantly (Andolfatto, 2008). The process of continuous economic growth must be accompanied by changes (Nidhi, 2010). It should be noted that developing nations are not the poorest ones, but since they do not commit to improving the internal factors that support economic development such as technology and innovation, they do not have a strong economic growth. The growth of an economy is supported by the factors that are inside the economy itself. The economists, who support this model, also came up with the AK model which is a very simple endogenous growth model. Y=AK, where it takes into consideration technology and capital in production.

Exogenous Growth

Exogenous growth is the opposite of endogenous growth. This model holds a notion that economic growth occurs due to factors that are outside the economy or the interest of the company. Thus, economic growth occurs because of the external factors and not the internal ones. The supporters of this theory argue that with fixed labor and technology the economic growth will halt at some point. The rate of economic growth will start to decline even when there are right inputs in terms of labor and technology since a point of equilibrium, which is determined by the internal demands, will occur (Andolfatto, 2008). Exogenous growth model stems from the neoclassical ideas of Robert Solow model. This important model is based on economic growth on the long-term basis that is set on neoclassical economics. It explains the long-term economic growth by labor, population growth, and even capital accumulation (Andolfatto, 2008).

According to exogenous model, the growth of economy is not only limited to endogenous factors, but the external factors play a very critical role in the development (Nidhi, 2010). Economic growth will occur when there are continuous innovations and changes, relevant to external factors. Through this, economic progress will continue. The growth rate of output of a worker is mainly dependent on labor, thus augmenting technological improvement. All the economies that apply the same technology could experience the same growth rates, but this does not happen. This can only be experienced by exogenous factors that are not included in the model. The differences in the levels of productivity are attributed to factors such as slow and faster growth rates (Nidhi, 2010).

The Impact of Government Policy on the Long-Term Growth Rate of an Economy

The government policy has a significant impact on the long-term growth rate of an economy. The long-run growth rate can be improved through the changes that are made in the short-term actions. Whenever some sectors of economy experience imbalanced growth, the government can come up with policies that will help in fostering economic growth through some ways. For example, the government can invest in the economy through investing in the infrastructure and even education. On the other hand, the government can also introduce a process of stimulating economic growth in order to meet the population needs (Bryan, 2013). On the other hand, the government introduces monetary policies to maintain economic growth. At the same time, monetary policy helps in controlling the excess inflation as well as excess growth in the short-term (Bryan, 2013). All these help in eliminating the obstacles that would otherwise hinder the long-term growth of the economy. The fiscal policies of the government, such as the economic regulation as well as the tax structure, also impact the long-term growth rate of the economy.

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Endogenous growth refers to the internal factors that impact economic growth. It is based on the idea that capital, investment, and policies play a role in the economic development and not exogenous factors. On the other hand, exogenous factors refer to the internal factors that lead to economic growth. The government policies play a very critical role in the long-term growth rate of the economy.

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