Question

Explain briefly two strengths and two limitations of the endogenous growth theory in practice

Answer 1

Strengths of the endogenous growth theory :
1.The savings rate and techonological progress rate can be explained by building macroeconomic models with the help of microeconomic knowhow,
2. There is possibility to model an endogenous growth theory with perfect competetion.

Limitations of the endogenous growth theory :
1. Fails to explain conditional convergence, i.e. in empirical studies, it cannot be proved that a series converges,but not absolutely.
2. Assumption of diminishing returns to capital - Does not clarify income divergence between developing and developed countries,