Question

The technical change in the endogenous growth model is endogenized by

• A. providing incentives to firms to innovate.
• B. making the saving function dependent on income.
• C. introducing constraints in capital accumulation.
• D. assuming a perfectly competitive market structure.

Answer 1

The Correct Option is A

To address the question regarding endogenized technical change in the endogenous growth model, we need to understand the concept behind the endogenous growth theory. This model emphasizes that economic growth is primarily the result of internal forces rather than external influences. One of these internal forces is technological change, which can be driven by economic incentives within the economy.

Let's evaluate the options:

1. Providing incentives to firms to innovate:
   • This option aligns directly with the core theme of the endogenous growth model. In this framework, technological improvements arise from deliberate investments in innovation and knowledge accumulation by firms and individuals.
   • Firms are typically motivated to innovate through potential profits, which leads to an increase in the stock of knowledge and subsequently fosters economic growth.
   • Therefore, providing incentives to firms to innovate is the mechanism through which technological change is endogenized in the model. Thus, this is the correct answer.
2. Making the saving function dependent on income:
   • This option is more relevant to Solow's exogenous growth model, where long-term growth is linked to capital accumulation, influenced by savings and capital depreciation.
   • While savings can affect the level of capital available for innovation, it does not directly endogenize technological change.
3. Introducing constraints in capital accumulation:
   • Constraints in capital accumulation do not enhance the mechanisms of innovation and technical change. Rather, constraints generally impact the amount of available resources for growth.
   • This does not reflect the endogenous character of growth driven by innovation.
4. Assuming a perfectly competitive market structure:
   • A perfectly competitive market structure implies that firms are price takers and there are no incentives for individual firms to innovate since profits normalized to zero.
   • Endogenous growth theory, on the other hand, often incorporates elements of imperfect competition because it allows firms to earn profits by producing new knowledge and technology, which is crucial for endogenous growth.

In conclusion, among the options provided, "providing incentives to firms to innovate" is the mechanism that endogenizes technological change in the endogenous growth model.