What is Modern Growth Theory - YouTube

in their attempt to explain growth economists had to move from

capital as the main reason for growth to technology and now started to believe

that resources and technology couldn't explain fully the difference in

economic growth across the world they started to move

towards examining the internal structure of the economy

and particular characteristics of each economy

the new growth theory is an approach that focuses on

economic growth and how it can occur from within the economy

rather than rely on external aid or external investment in capital

how can economies develop from within economy started to look

at the incentive mechanism to foster innovation from within the economy this

led to a new area of interest called endogenous growth endogenous growth is

growth driven by factors inside of the economy

the production function needs to be adjusted our production function is more

complete with GDP equal to a which is technology

times our production function which our production function now includes capital

human capital and institutions recall that institution is the

environment in which decisions are being made in our previous

discussion we talked about growth concepts and we defined institutions

and now we see that they can lead to endogenous growth

modern growth theory provides policy makers with specific

policies to help increase economic growth as we look around the world we

can see countries growing because they have

introduced positive institutions and reform positive institutions we mean

things like transparent and consistent government

freedom of the press individual freedoms private property

rights stable money and prices we also

can look around the world and see negative institutions

corruption political instability lack of individual freedom

all restrict growth they hinder people from making decisions

and long-term investments which are both needed to spur innovation

positive institutions to foster economic growth and to increase

endogenous economic growth can be summarized as

political stability and the rule of law private property rights

competitive markets international and open trade

flow of funds across borders efficient taxes

and stable money in prices an economy that invests in developing a health

developing healthy institutions will allow for endogenous growth

and graphically our production function increases

by implementing policies and private property rights

and enhancing the decision-making process for our citizens

where they now have the incentive to create their own technology

they become reliant on developing their new ideas and productivity

we increase their output from y1 to y2 by holding capital constant this

actually is a cheaper method to spur economic

growth develop the infrastructure the economy has k capital now

but it uses it more efficiently and produces

more a good example of this is Chile from 1900 to 1985

Chile grew at a rate of less than one percent

in 1975 chile began drastic economic reforms

from 1985 to 2016 growth averaged 3.7% these economic reforms

unleashed a new economic environment allowing people to take the same

resources but use them more productively and

that's why we look at institutions as a way to create endogenous economic growth

institutions allow for sustainable growth model however institutions can

easily deteriorate that is why policies and governments matter

bad reforms are as possible to implement as good reforms

there are many examples from around the world where economies once were thriving

and now are not doing as well because institutions were eroded

as we close off this discussion it's important to recap

the difference between the growth models Solow growth model one relied on

emphasis on capital as a source of economic growth

when we look at that model there are two main concepts that come out of it

the idea of steady state and convergence hypothesis

Solow growth model one does not reflect all possible growth we observe in the

world the Solow growth model two now relies on

technology but the problem with that is it assumes

technology is exogenous other than luck and

external investment it was hard to spur economic growth

also continuous investment by local and external governments organizations

were needed to continue growth once the funds stopped

so did the growth modern growth theory or endogenous growth theory

allows for endogenous growth and for policy makers to directly impact

the growth possibilities modern growth theory relies on the development of

institutions that foster endogenous growth and these institutions

rely on people being able to make long-term decisions easier from an

economic standpoint these are the three models that we use to explain

economic growth and the evolution of our ideas around economic growth

what this should highlight to you is how important it is to look

at what models we currently have and how to improve upon them

and to reflect exactly on what's happening in the world

but most importantly we have to implement these models to see if they

work or not finally an important thing is real world

observation allow us to see what else is happening

or allow us to ask the right questions

about what's happening in the economy you too can influence economic ideas by

observing and questioning the things

that happen around you that in a nutshell

is economic growth theory