What is the Exogenous Growth Theory?

What is the Exogenous Growth Theory?

Exogenous growth, a key tenet of neoclassical economic theory, states that economic growth is fueled by technological progress independent of economic forces.

Exogenous growth, a key tenet of neoclassical economic theory, states that economic growth is fueled by technological progress independent of economic forces.

The exogenous growth model factors in production, diminishing returns of capital, savings rates, and technological variables to determine economic growth.

Both the exogenous and endogenous growth models stress the role of technological progress in achieving sustained economic growth.

Why is Exogenous Growth Theory Important?

As a neoclassical growth model, the exogenous growth theory does not believe that internal factors or economic factors influence economic growth. Rather, factors such as savings rates, technological variables, technological progress and improvements, production and diminishing returns of capital fuel economic growth. The endogenous growth model and exogenous growth model have diverging views with regard to factors that fuel economic growth.

The endogenous growth model for instance states that economic factors or internal factors influence economic growth. The exogenous growth model maintains that to grow an economy, factors or forces outside of the economy must be considered. This means that economic forces like population, capital investment, company of interest and some others do not fuel economic growth. Examples of exogenous (external) economic factors are;

  • Savings rate
  • Technological innovations and advancement
  • Production
  • Diminishing returns of capital.

Examples of endogenous (internal) economic factors are;

  • Investment
  • Growing population and workforce
  • Economic policies.
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