ECON3004 Macroeconomic Theory-promote economic growth

Task: 

Some questions that we might like an economic growth model to answer are:
 
1) How does TFP growth respond to the quantity of public funds spent on public education?

2) How is TFP growth affected by subsidies to R&D?

3) Does it make sense to have the government intervene to promote economic growth?

The Solow growth model CAN’T answer these questions – but a model of “endogenous” growth, where growth rates are explained by the model, potentially can.

In this model, the representative consumer allocates his or her time between supplying labor to produce output and accumulating human capital, where human capital is the accumulated stock of skills and education that a worker has at a point in time. The higher the human capital that workers have, the more they can produce. Therefore, a higher level of human capital means that the economy can grow at a faster rate.

 
Now, if we think in terms of real-world economies, at any given time, we would have some people working,some in school, and some that are unemployed or not in the labor force. There is a social opportunity cost associated with people of working age who are in school, as these people could otherwise be producing goods and services. By acquiring school, however, people accumulate skills (ie. Human capital), and a more highly skilled labor force in the future permits more future output to be produced given the same conditions. Also, a more highly skilled population can better pass on skills to others, and so human capital accumulation is more efficient if the level of human capital is higher.
 
How do we reconcile the predictions of the endogenous growth model concerning convergence with the facts?
The model appears consistent with the fact that:

1) there are persistent differences in per capita income among poorer countries

2) there are persistent differences in per capita income between the poorer countries of the world and the richer countries.

The model appears inconsistent with the fact that:

1) per capita incomes seem to have converged among the richer nations of the world

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