Chapter 2 The AK Model - Brown University

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.

Accordingly we devote this chapter to developing the AK model and to summarizing the empirical debate that took place in the 1990s between its proponents and proponents of the neoclassical model of Solow and Swan. 1.1 The Harrod-Domar model An early precursor of the AK model was the Harrod-Domar model,2 which assumes that the

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