CFA Level II ExamEconomicsMedium
A developing country, 'Atlantica,' is experiencing robust economic growth driven primarily by the accumulation of physical capital and a rapidly expanding labor force. However, analysts are concerned that Atlantica's long-term growth prospects may be limited if it does not address its low rate of technological innovation. Which economic growth theory most directly supports this concern?
- ANeoclassical Growth Theory (Solow Model)
- BEndogenous Growth Theory
- CDependency Theory
- DClassical Growth Theory
Show answer & explanationAnswer & explanation
Correct answer: B. Endogenous Growth Theory
Endogenous growth theory emphasizes that technological progress is not exogenous but rather a result of investment in human capital, innovation, and R&D, which can sustain long-term growth. The concern about low technological innovation directly aligns with this theory's premise.
Why the other options are wrong
- A. The Neoclassical (Solow) model treats technological progress as exogenous, meaning it's not explained within the model, which doesn't fit the concern about 'addressing' innovation.
- C. Dependency theory focuses on the exploitation of developing countries by developed ones, not directly on the internal drivers of technological innovation.
- D. Classical growth theory focuses on population growth and diminishing returns to labor, often predicting a subsistence steady state.
Endogenous Growth Theory
A theory of economic growth that emphasizes that technological progress and long-term growth rates are determined within the economic system itself, driven by factors like investment in human capital, innovation, and R&D.
- Technological progress is endogenous, not exogenous.
- Investment in R&D, human capital, and innovation are key drivers.
- Can explain persistent differences in growth rates between countries.
- Policy interventions can influence long-term growth rates.
- Returns to capital may not diminish in the long run.
Memory trick: Growth's internal spark, not just external mark.