Chapter 14 Economic Growth . Introduction This chapter describes basic nonstochastic models of sustained economic growth. We begin by describing a benchmark exogenous growth model, where sustained growth is driven by exogenous growth in labor productivity. | Chapter 14 Economic Growth . Introduction This chapter describes basic nonstochastic models of sustained economic growth. We begin by describing a benchmark exogenous growth model where sustained growth is driven by exogenous growth in labor productivity. Then we turn our attention to several endogenous growth models where sustained growth of labor productivity is somehow chosen by the households in the economy. We describe several models that differ in whether the equilibrium market economy matches what a benevolent planner would choose. Where the market outcome doesn t match the planner s outcome there can be room for welfare-improving government interventions. The objective of the chapter is to shed light on the mechanisms at work in different models. We try to facilitate comparison by using the same production function for most of our discussion while changing the meaning of one of its arguments. Paul Romer s work has been an impetus to the revived interest in the theory of economic growth. In the spirit of Arrow s 1962 model of learning by doing Romer 1986 presents an endogenous growth model where the accumulation of capital or knowledge is associated with a positive externality on the available technology. The aggregate of all agents holdings of capital is positively related to the level of technology which in turn interacts with individual agents savings decisions and thereby determines the economy s growth rate. Thus the households in this economy are choosing how fast the economy is growing but do so in an unintentional way. The competitive equilibrium growth rate falls short of the socially optimal one. Another approach to generating endogenous growth is to assume that all production factors are reproducible. Following Uzawa 1965 Lucas 1988 formulates a model with accumulation of both physical and human capital. The joint accumulation of all inputs ensures that growth will not come to a halt even though each individual factor in the final-good .
