Exogenous Growth

Definition

Exogenous growth is an economic theory that attributes long‑run increases in output primarily to factors outside the economic system—most notably technological progress. In this view, technical change is treated as an independent, unexplained driver of productivity rather than something produced by the economy itself.

How the theory works

• Output growth depends on inputs (capital and labor) and on technology, where technological improvement is treated as an external (exogenous) factor.
• Diminishing returns apply to capital: adding more capital increases output but at a declining rate, so capital accumulation alone cannot sustain perpetual growth.
• Because technology is assumed exogenous, sustained per‑capita growth ultimately requires ongoing external technological progress.

Core models that use the exogenous growth framework

• Solow model: Emphasizes capital accumulation, labor growth, and an exogenous rate of technological progress. Predicts convergence toward a steady state where per‑capita growth equals the rate of exogenous technological progress.
• Harrod–Domar model: Focuses on the roles of savings and capital‑output ratios in determining growth and the possibility of instability without technological change.
• Ramsey model (in some formulations): Incorporates optimizing behavior and intertemporal choices; when technology is treated as given, long‑run growth is still driven by exogenous technical progress.

Exogenous versus endogenous growth

• Exogenous growth: Treats technological change as an external force. Policy can affect the level of capital and resource allocation, but long‑run per‑capita growth rate is set by external technological advances.
• Endogenous growth: Explains technological progress as the result of intentional, internal economic activities—R&D, human capital formation, knowledge spillovers, and policy choices. Here, growth can be sustained by mechanisms within the economy, and policy can permanently affect the growth rate.

Implications for policy

• Under the exogenous view, policies that raise savings or investment speed the transition to a higher level of output but do not change the long‑run per‑capita growth rate unless they influence the rate of technological progress (which is assumed external).
• If policymakers want to raise the sustained growth rate, they must influence the drivers of technological progress—through education, research subsidies, institutions, and policies that foster innovation—an idea more consistent with endogenous frameworks.

Limitations

• Treating technological progress as unexplained limits the ability to analyze how policy, institutions, and economic incentives affect long‑term growth.
• The exogenous approach can understate the role of knowledge accumulation, human capital, and innovation systems in producing sustained growth.

Key takeaways

• Exogenous growth posits that sustained per‑capita growth depends on external technological progress rather than internal economic mechanisms.
• Models like Solow illustrate how capital accumulation faces diminishing returns and why exogenous technology is needed for indefinite growth.
• Endogenous growth theory arose to explain how economic activity itself generates technological progress, highlighting the potential for policy to affect long‑run growth rates.