Economic Growth Model: Rebelo's Economic Development Model

REBELO’S MODEL

Rebelo assumes that the production function is linear in the only input(capital). Hence there is constant returns to scale and constant returns to capital. The production function is

Y=f(K,L)=AK

Where;

A= an exogenous constant

K= aggeregate capital

Thus K can include not just physical capital but also human capital as well as stock of knowledge and even financial capital differences ENDOGENOUS GROWTH THEORY NEOCLASSICAL GROWTH THEORY

Steady state growth rate is determined endogenously Steady state growth rate is determined exogenously

It assumes that public and private investment in human capital generate external economies and productivity improvements that offsets the natural tendency for diminishing returns It assumes diminishing

 It is dependent on a number of neoclassical that are often inappropriate for developing economies, e.g. it assumes that there is but a single sector of production or that all sectors are symmetrical. This does not permit growth generating reallocation of capital and labor among sectors that are transformed during the process of structural change.

 According to Scott and Auerbach, the main ideas of the new growth theory can be traced to Adam Smith and increasing returns to Marx’s analysis.

 Srinivasan does not find anything new in the new growth theory because increasing returns and endogeneity of variables have been taken from the neoclassical and Kaldor’s models.

 Fisher criticizes the new growth theory for depending only on the production function and the steady state

 Economic growth in developing countries is impeded by frequent inefficiencies arising from poor infrastructure, inadequate institutional structures e.t.c. because endogenous theory overlooks these influential factors, its applicability for the study of economic development is