Consider the endogenous growth model
Consumer behaviour is summarized byC=wuHs
The law of motion for human capital is given byHs’=b(1-u)Hs
The production function isY=zuHd
(a) What is the main difference between this model and the Solow growth model in terms of how growth is explained?
(b) Solve for a competitive equilibrium in this framework. What is Y, C, H’ in equilibrium?
(c) Solve for the growth rates of Y, C and H’.
(d) What is the key prediction of this model? What is the importance of b and u?
(e) Explain why this model explains differences in living standards between poor countries and rich and poor countries but has a hard time account for these differences between rich countries.