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Endogenous and exogenous growth theories.

In neoclassical growth models, the sources of growth, is exogenous usually \”technology\”. Such theoretical models hence are able to describe how an economy grows, but not why it grows. To overcome this shortcoming, several growth models have been developed that make growth an endogenous variable. In contrast to neoclassical growth theory, endogenous growth theory argues that policy measures (such as subsidies on R&D and education) can have an increase long-run growth rate of an economy.
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· Developing a brief summary of endogenous and exogenous growth theories.
· Analyzing the impact of government policy on the long-term growth rate of an economy.

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Endogeneous and Exogeneous growth theories: Introduction

Neoclassical theories as demystified in economics are primarily augmented as fundamental in the achievement of ustained economic growth. Given this, neoclassical theories primarily factor in outputs and inputs, which encompasses the stocks of an accumulated physical capital or goods. The theories mainly include the exogenous and endogenous growth models that have made significant transitions into an array of criticisms and notions. The proponents who subscribe to the exogenous growth model allege that technological innovation and progress remain a determinant of a long-run economic growth process and an internationally productive difference. Contrarily, the endogenous adherents propagate two notions, one that postulates that the construct of capital mainly used for innovation may exhibit an increase in yields or returns that may scale up productivity as evident today. The second notion holds that there are a set of factors that often affect capital adeptness, resulting in capital flights that explain the reasons behind differences in international productivity. Therefore, this audit seeks to marry the two growth theories—the endogenous and exogenous models to analyze their impact on government policies, especially on the economy’s long-run growth.


Endogenous Versus Exogenous Growth Theories

The endogenous and exogenous growth models have been widely challenged and debated through the evolution of specific economies as factors tied to the neoclassical approaches of growth. However, these models have played a fundamental role in extrapolating the connection between an economy and growth, providing limited information regarding how growth is achieved. Imerman (2012) posits that these theories were primarily designed to underscore some of the variables and policy measures that may increase growth within an economy. For instance, according to Imerman (2012), education and other subsidiaries such as research and development (R&D) impact the growth rate of an economy over the long run. This factor reveals why several debates have ensued among policy developers over these theories’ effects in positively impeding growth.

From Durand’s (2013) point of view, the two differential growth strategies pose significant impacts on an economy given that they pose an inside and outside push on the growth factor. In other words, the endogenous growth theory mainly focuses on an array of individual elements that often affect the growth of an economy from the inside. According to Durand (2013), when external factors within an economy are increased externally, for instance, an increase in the labor force through the use of fixed capitals, the specific economic wealth is likely to be realized through this is dependent on the amount of input used in achieving growth. Another fundamental aspect provided by Johansen & Sornette (2002) lies in the assumption that endogenous growth primarily focuses on the rate of growth affected mainly by a set of external factors often considered to spill over varied effects. An example of this, as provided in the case, lies in particular improvements emanating from the growth of technology within an economy. Such growth is likely to increase the rate of output and production within an economy.

Consequently, Kinsella (2010) provides a different opinion regarding the two growth variables, citing that exogenous growth models often consider economic growth from the standpoint of effects wrought by external factors and influences. In other words, the reliance on a set of factors such as the fixed rate of technological growth and the constant flow of labor as provided in the exogenous model may cause growth to plateau, a view supported by Shi et al. (2013). According to Shi et al. (2013), the production process that often occurs reaches a symmetrical level. The author attributes this to the efforts of an economy to meet its internal demand. Given this, it is, therefore, assumable that the exogenous growth model, growth within an economy is achievable in the event that returns are significantly diminished while the variables of technology and capital are maintained. Contrarily, Shi et al. (2013) view endogenous growth as a variable that is mainly based on capital investments, policies, and various internal procedures, often considered critical in the growth of any economy.  Therefore, Shi et al. (2013) opine that the endogenous growth model is the complete opposite of the exogenous model. However, the supporters of the endogenous growth model hold that capital investment is solely injected into an economy by a government that increases technological growth attributed to the growth of an economy—a view that is yet to be proven.

Government Policing Impact on the Long-Term Growth Rate of an Economy

The determinants of an economy’s growth have long been tested by economists, revealing several variables that are significant in impacting the long-term growth of a nation’s economy. As found in a study by Gupta (2018), government policies have always had a substantial impact on the long-run economic growth and the formation of new businesses. Firstly, it is essential to accentuate that government plays a fundamental role in fostering an environment where businesses thrive, which results in the achievement of economic growth. Several of the efforts that governments put revolve around the stimulation of businesses by creating and expanding policies that come as tax incentives, allowing the process of growth over the long-term. However, Holman (2001) provides a different opinion in regards to this matter. As provided in the views of Holman (2001), while the government may develop policies that often provide preferential taxation, it is evident that investment tax credits, as well as targeted capital gains, may prove to be beneficial while in other times, subtle policy aspects and factors need predictability.

In this regard, Škare & Golja (2014) provides that chief in the long-term economic growth of an economy is the environment in which the government creates a long-term assessment of a policy possible. For example, the lack of policy visibility as evident in the U.S. remains a recipe for a politically divided country, the fear for different and new regulations and taxes, a factor that may pose chilling effects on the growth of an economy. On the other hand, uncertainty and the complexity of policies remains a factor that may deter the growth of entrepreneurial activities within different international markets, with this considered a factor that may affect the growth of an economy. Muinelo-Gallo & Roca-Sagalés (2011) equally reveals that unfair trade activities and practices that go unpoliced, with precision to the theft of elements such as property rights, remain a factor hinders entrepreneurs and small businesses from engaging in specific areas, hence deterring economic growth. Given this, it is therefore essential to establish that this research has revealed that contemporary monetary or financial policies often have a more significant impact on businesses and their activities. Thus, the implications of these factors revolve around the negative growth of an economy over the long-run.


As revealed in this research study, the endogenous and exogenous growth models have been widely challenged and debated through the evolution of specific economies as factors tied to the neoclassical approaches of growth. However, these models have played a fundamental role in extrapolating the connection between an economy and growth, providing limited information regarding how growth is achieved. Lastly, this study’s findings equally reveal that contemporary monetary or financial policy often significantly impacts businesses and their activities. Therefore, the implications of these factors revolve around the negative growth of an economy over the long-run.


Durand, R. (2013). Thinking and growing: Towards a reconciliation of exogenous and endogenous growth theories. Journal of Economic and Social Measurement, 38(2), 187–200. https://doi.org/10.3233/jem-130375

Gupta, R. (2018). The Impact of Government Expenditure on Economic Growth in Nepal. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3099218

Holman, J. A. (2001). Government Budgetary Policies, Economic Growth, and Currency Substitution in a Small Open Economy. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.272435

Imerman, M. B. (2012). Structural Credit Risk Models: Endogenous versus Exogenous Default. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2146780

Johansen, A., & Sornette, D. (2002). Endogenous versus Exogenous Crashes in Financial Markets. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.344980

Kinsella, S. (2010). Pedagogical approaches to theories of endogenous versus exogenous money. International Journal of Pluralism and Economics Education, 1(3), 276. https://doi.org/10.1504/ijpee.2010.034689

Muinelo-Gallo, L., & Roca-Sagalés, O. (2011). Economic Growth and Inequality: The Role Of Fiscal Policies*. Australian Economic Papers, 50(2-3), 74–97. https://doi.org/10.1111/j.1467-8454.2011.00412.x

Shi, S., Chan, A. G., Mercer, S., Eckert, G. J., & Trippel, S. B. (2013). Endogenous versus exogenous growth factor regulation of articular chondrocytes. Journal of Orthopaedic Research, 32(1), 54–60. https://doi.org/10.1002/jor.22444

Škare, M., & Golja, T. (2014). The impact of government CSR supporting policies on economic growth. Journal of Policy Modeling, 36(3), 562–577. https://doi.org/10.1016/j.jpolmod.2014.01.008