Endogenous Growth and International Trade
The recent advancement in growth theory is usually referred to as the theory of endogenous growth. Earlier in Chapter 19, we discussed how endogenous capital accumulation in a two-country world leads to changes in a country’s comparative advantage along the path from any momentary equilibrium to the steady-state. In the context of the neotechnology theory, we also discussed how trade is generated by exogenously given process innovation and product innovation, specifically when the technologically advanced country costlessly innovates and the technologically less-advanced country costlessly imitates the new technology with a lag in time. However, the recent work1 in growth theory emphasises the role of technological progress which takes place endogenously because of either ‘learning by doing’ or deliberate effort to invent new products and new processes by investing in research and development. The title ‘endogenous growth’ owes its genesis to endogenous knowledge creation.
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