According to the neoclassical Solow Model, perfect competition produces the best outcomes for society as a whole. Paul Romer and Joseph Schumpeter pose new theories that involve imperfect competition.

Suppose that you are planning to drive your car from Tokyo to Osaka to visit a friend of yours and want to minimize your driving time. Then the turnpike theory suggests you to take the following route: A history of Turnpikes The turnpike theory is originated in two famous papers. Later the turnpike property has been demonstrated in either of these models.

We will explain both turnpikes respectively. The reader who wants to quickly learn a brief history of the turnpike theory should consult an excellent survey article by McKenzie First of all, define the following important notation: The following theorem is first proved by von Neumann and later many economists tried to simplify his proof.

This balanced growth path is often called the von Neumann balanced growth path or just the von Neumann ray.

Then we may rewrite the transformation function as: It should be emphasized that their analysis has a serious defect. Since their proof depends on the local theory, it does not hold for paths starting from any distant point. McKenzie has generalize the original DOSSO model into the model with n goods and the homegenious first degree transformation function.

The second property implies that there is a flat segment on the surface of the transformation function, called a "facet". The following lemma is very important to show the turnpike. Now it is straightforward to demonstrate the turnpike theorem.

Then the sum of the values lost will be excessive. By linking the value loss to the optimality criterion, we would be able to obtain a turnpike theorem. Radner proves the turnpike theorem by making the following additional assumptions: Suppose that assumptions a1 to A9 hold.

In other words, the optimal path may enter and leave the neighborhood several times. Introduction The theoretical perspective based on the external effects and endogenous growth of increasing returns to scale technologies stressed by Romer and Lucas has in the past decade had a considerable influence on macroeconomics as well as growth theory and development theory, and a massive thesis has been produced pertaining to these matters.

Aghion and Howitt has compactly surveied these results. Though this sort of theoretical analysis is in vogue, most of the empirical research supporting these theories used aggregated macro data.

Due to restrictions on data, little research has been conducted at the industrial level. Among these researchers, Hallmeasured the economy of scales of American industries. These measurements indicated the existence of a considerably large scale economy and externality of production, providing support for the theories of Romer et al.

Also, the results of a series of investigations conducted by Basu and Fernaldshowed that constant returns were the rule for the economy of scale in most American industries, with almost no externality of production among industries.

The thing that can be understood from this empirical research is that when aggregated data is used, economy of scale can become conspicuous because of aggregation. This suggests that there are serious problems with Solow-type exogenous growth models and Romer-type endogenous growth models, which take only one sector into consideration as one type of capital good or representative industrial sector.

From the perspective of analytical technique, it will be necessary to rely on a phase-diagram-based analysis to conduct a global analysis.The Romer model • Focusses on the distinction between ideas and objects • Stipulates that output requires knowledge and labour The production function of the Romer model * Compare this to the Solow model, where output per person depends on capital per person.

Romer and Schumpeter in Endogenous Growth Based on previous readings in this class, we already know that productivity is the most important factor in economic growth; however, what we haven’t learned is how productivity can be affected.

The Solow Model, also known as the neoclassical growth model or exogenous growth model is a neoclassical attempt created in the mid twentieth century, to explain long run economic growth by examining productivity, technological progress, capital accumulation and population growth.

Jul 17, · Home > Macro, Solow Model > The difference between Solow and Harrod-Domar The difference between Solow and Harrod-Domar.

July 17, mnmecon Leave a comment Go to comments. The Harrod-Domar model is a good starting model for thinking about growth. It is based on a few key concepts.

The economic growth rate is calculated from data on GDP estimated by countries' statistical agencies. The rate of growth of GDP per capita is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst.

Endogenous growth theory holds that economic growth is primarily the result of endogenous and not is substituted in the equation of transitional Dynamics of Solow-Swan model (exogenous growth model), and f(k) is the output function per worker, how an economy’s per capita incomes converges toward its own steady-state value, to the per.

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