Endogenous Growth Theory Case Study

Endogenous Growth Theory, its Application, & How it Compares
This paper will be outlining the theory behind the Endogenous Growth Theory, or EGT, and its comparison to other competing theories. To begin though it is important to clarify that the word endogenous just means to originate from within, or not attributable to any external or environmental factor, so one can assume that this theory relates to growth happening within the region instead of having to depend on external forces for market growth. EGT forces primarily on human capital, innovation, knowledge, and entrepreneurship to be the major contributors to economic growth within a region (Bennett). This innovation is a large part of the EGT, which manifests itself from research and

To begin many theories hold a number of assumptions about the markets, but neoclassical takes this to an extreme. NGT assumes that there is full employment, no externalities or transportation costs and perfect competition just to name a few from the slew of others. This large amount of assumption is one reason why Romer established EGT in his 1986 dissertation (Fine) . These assumption are numerous and rather important in an economy and to assume all of these things it starts to take away from its real world application. Endogenous growth theory seeks to explain many of the assumptions that NGT hold constant. One such assumption is that technology is a constant and steady

This assumption also limits its application to the real world greatly. Empirically we know that market failures and externalities to exist in almost, if not all, markets throughout the world. With this in mind EGT looked to explain these assumptions in its theory. Externalities are an important aspect of EGT and how technology advances economic growth. In the theory one form is the positive spillover, or externality, between firms and industry that are located near one another. These positive spillovers can take different forms, such as shared labor force that bring benefits to each firms, or a locational advantage of being situated near other firms (Hiro). These externalities provide these firms with a comparative advantage over the firm whom do not participate in this exchange. Externalities though are not alway positive and can also be a decentralizing force among the marketplace. These negative aspects are things such as pollution or traffic congestion. How to deal with these negative impacts is still up for toss. according to our slides on EGT its a toss up on if government intervention with policies will correct the situation or that intervention on the government 's behalf will only make the situation