What is Exogenous Growth?

The Exogenous growth theory is an economic theory that states that economic growth occurs as a result of factors independent of the economy. This theory is one that maintains that economic growth is not affected by internal factors or influenced by the economy, rather by factors that are outside of the economy. The exogenous growth theory is one of the neoclassical growth models, this theory holds that technological improvement fuels economic growth, alongside other factors outside of the economy.

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Why is Exogenous Growth Theory Important?

As a neoclassical growth model, the exogenous growth theory does not believe that internal factors or economic factors influence economic growth. Rather, factors such as savings rates, technological variables, technological progress and improvements, production and diminishing returns of capital fuel economic growth. The endogenous growth model and exogenous growth model have diverging views with regard to factors that fuel economic growth. The endogenous growth model for instance states that economic factors or internal factors influence economic growth. The exogenous growth model maintains that to grow an economy, factors or forces outside of the economy must be considered. This means that economic forces like population, capital investment, company of interest and some others do not fuel economic growth. Examples of exogenous (external) economic factors are;

• Savings rate
• Technological innovations and advancement
• Production
• Diminishing returns of capital.

Examples of endogenous (internal) economic factors are;

• Investment
• Growing population and workforce
• Economic policies.

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