Transcription of Chapter 2 The AK Model
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Chapter 2 The AK Model
Chapter 2 The AK ModelApril 2, 20081 IntroductionThe neoclassical Model presented in the previous Chapter takes the rate of technologicalchange as being determined exogenously, by non-economic forces. There is good reason,however, to believe that technological change depends on economic decisions, because itcomes from industrial innovations made by pro t-seeking rms, and depends on the fundingof science, the accumulation of human capital and other such economic activities. Technologyis thus an endogenous variable, determined within the economic system. Growth theoriesshould take this endogeneity into account, especially since the rate of technological progressis what determines the long-run growth endogenous technology into growth theory forces us to deal with the di -cult phenomenon of increasing returns to scale.
Harrod and Domar emphasize, capital is the limiting factor. Firms will produce the amount Y = AK; and hire the amount (1=B)Y = (1=B)AK<Lof labor. Now, with a –xed saving rate, we know that the capital stock will grow according to the same equation as in the neoclassical model: K_ = sY K: (1) These last two equations imply: K_ = sAK K;
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