Endogenous Growth Theory

Published Mar 20, 2023

Definition of Endogenous Growth Theory

Endogenous growth theory is a concept in economics that suggests economic growth can be achieved through various internal factors, such as investments in human capital, knowledge, research, and development. In traditional economic theory, growth is seen as the result of external factors, such as technological change, natural resources, and increasing population. Endogenous growth theory proposes that the accumulation of knowledge, technological advancements, and human capital can all contribute to sustained economic growth.

Example

For example, let’s consider two countries, Country A and Country B. Country A invests heavily in education and research and development, while Country B does not. Over time, Country A’s workforce becomes more skilled and educated, generating more innovative ideas and new technologies. As a result, the economy of Country A grows at a faster rate than Country B, which lacks these investments in knowledge and human capital. The endogenous growth theory supports such investments, as they can contribute to sustained long-term growth.

Why Endogenous Growth Theory Matters

Endogenous growth theory matters because it provides a different approach to economic growth than traditional economic theory. By focusing on internal factors like investments in education and innovation, countries can create their own opportunities for economic growth. This is particularly relevant for developing countries that lack natural resources and face external limitations on growth.

Moreover, this theory recognizes the importance of investments in human capital, which can lead to better job opportunities, higher wages, and an overall better quality of life for the population. Therefore, policymakers can utilize endogenous growth theory to implement policies that encourage investments in knowledge, research, and development in order to generate long-term economic growth.