Page 1 :
simp es, , AK Model ; ., & AK Model it is assumed that the population or number of workers remains the same which, impli, , es that the growth rate of output per worker will be the growth rate of output of the economy, , AK Model is based on the following aggregate production function :, Y=AK .Q), , ‘where Y is aggregate output, K is total capital stock and A is a positive constant. It is noteworthy that, , in the capital stock K, both physical and human capital are included., , The above AK production function shows that an additional unit increase in capital K causes, increase in output by A units irrespective of how much capital is used in production. Thus A measures, marginal product of capital that does not depend on the rise of capital stock in the production function., Therefore, in the production function y = AK, implies that marginal product of capital does not, diminish as more units of capital are added to increase production and instead remains constant. This is, contrary to neoclassical growth theory of Solow in which marginal productivity of capital diminishes), , ow, an important question arises: What accounts for constant marginal productivity of capital) for, the economy as a whole when there is increase in capital stock ? A number of explanations have been, given for this. The important explanation lays stress on the role of human capital which is included in, the K term of above aggregate production function. By human capital economists mean the knowledge., skills and training of the people, especially the workers who are engaged in the production process, of goods: Imparting knowledge, skills to the people is described as investment in people as it rai:, their productivity. Increases in physical capital alone, keeping human capital constant, will ase, diminishing marginal productivity of capital According to endogenous growth theo sere, of physical capital takes place in the economy, its human capital also increases in the oa semen, through the process what is called learning by investment so that each addition: 1 ies Pedic, s on with the same quantity of human capital which ensures that maga pis igueieae, capital does not diminish. Thus, acc i i i ‘ ily ©, s, accumulation of capital brings about continuous growth of output., , In this AK model of endogenous growth theory, a second ex i :, ot remaining the same as capital pan ee place ae ccemenie ae of, ina growing economy the firms have incentives to undertake investment in rescarch. on the fact that, (R&D) activities. These R&D activities lead to the discovery of new production t ‘ani Saha, Products WV ith the use of new production techniques and increase in technical tient = a, accumulation takes place in the economy marginal productivity of capital does aes aan as capital, makes continuous economic growth possible. Having explained how production function, Y. that, ensures constant marginal product of capital when we incorporate into the analysis the ermerl = AK, capital and research and development activities, we are in a position to bring out the cmplaten, een of endogenous growth theory{Let us assume that saving, S is a constant eeopenten..¢ or, Wiens Y which is equal to AK In the model. Thus S = sY = sAK. Since a closed economy, must equal saving, we have, , [=AK QD

Page 2 :
Te MOY OIUMENSTH LCUNUHGS, , Crow, investment is net addition to the stock of capital (AK) plus depreciation (dk), that ig, 1= AK + dK (Note that K is the stock of capital and d is the rate of depreciation). Substituting, 1 =A K + dK in equation (2) above, we have, , AK+dK=sAK -+.(3), Dividing both sides of equation (3) by K, we have, , oe tds, , Now, taking d on the right side of the above we have, , ye 784-d +4, , > is the rate of growth of capital stock. Since output is assumed to be proportional to the Capital, , " : AK, stock, rate of growth of output (47) will equal the rate of growth of capital stock (*) - Thus, the, , above equation (4) can be rewritten as, : AY, , “py asa-d : rr) |, , The above equation (5) of the AK model of endogenous growth theory shows that growth of, output (2) depends on the saving rate (s). The higher the saving rate, the higher the rate of long, Tun rate of growth of output. As it has been assumed that the number of workers remains the same, over time, the rate of growth of output per worker will be equal to the rate of growth of output as, given by the equation (5) above, that is, equal to s4—d, The rate of growth of output per worker also, depends on the saving rate. The finding that long-run rate of growth of output depends on the saving, rate is in a sharp contrast to Solow’s neoclassical growth model in which rate of saving affects only, the short-run growth rate and does not determing the long-run rate of growth of output. Commenting, on the conclusion of endogenous growth model) Abel, B.S. Bernanke and D, Croushore write,, “Saving affects long-run growth in the endogénous growth framework because, in that framework,, higher rates of saving and capital formation stimulates 8reater investment in human capital and, R&D. The resulting increases in productivity help to spur long-run growth. In summary, in comparison, to the Solow model, the endogenous growth model places greater emphasis on saving, human capi, Jormation and R&D as sources of long-run growth,”, , Can important implication of endogenous growth model is that the Government can influence the, , long-run growth rate by taking suitable policies to raise saving rate of the economy.