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Study Notes

Economic Growth - Endogenous Growth Theory

AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Endogenous growth economists believe that improvements in productivity can be linked directly to a faster pace of innovation plus investment in human capital.

  • They stress the need for strong government and private sector institutions to nurture innovation, and provide incentives for individuals and businesses to be inventive.
  • Knowledge industries - typically they are in telecommunications, software or biotechnology - are becoming hugely important in many developed and developing countries.

The main points of the endogenous growth theory are as follows:

  • Government policies can raise a country’s growth rate if they lead to more intense competition in markets and help to stimulate product and process innovation
  • There are increasing returns to scale from capital investment especially in infrastructure and investment in education and health and telecommunications. A recent report from the World Bank found that, for low and middle income countries every 10% increase in broadband accelerated GDP growth by 1.38%.
  • Private sector investment in research & development is a key source of technical progress
  • The protection of property rights and patents is essential in providing incentives for businesses and entrepreneurs to engage in research and development
  • Investment in human capital (the quality of the labour force) is a key ingredient of growth
  • Government policy should encourage entrepreneurship as a means of creating new businesses and ultimately as an important source of new jobs, investment and innovation

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