3 - Endogenous Growth Theory

Question 1

Key things about the endogenous growth theory (spoke about this theory in lecture 1)

Answer 1

• Research and development, fostering innovation, innovation and imitation (Frontier theory)
• Education and training
• Human capital, learning by doing, spill over effect
• Knowledge is public good
• No subject to diminishing return

Question 2

What are supply side policies (market-oriented policy) (expansionary fiscal policies)

Answer 2

Measures governments take to increase availability or affordability of goods and services, along with policies that may encourage people to be more productive

Question 3

How’s tax cutting a supply side policy

Answer 3

• Tax cut = Increases take-home pay for workers, providing individuals stronger incentive to work.
• Lower taxes attracts FDI increasing capital inflows and job creation
• More disposable income, therefore more consumption increasing economic growth

Question 4

How’s reducing power of labour a supply side policy

Answer 4

• Reducing power of labour aims to increase the productivity and efficiency of businesses
• This reduces labour costs, creating an incentive for businesses to invest and expand , leading to increased production and economic growth
• Government can reduce power of labour by making it easier for employers to hire and fire workers, adjust wages and negotiate labour contracts
• May also introduce policies that limit power of trade unions

Question 5

How’s a cut in benefits a supply side policy

Answer 5

• Cutting unemployment benefits will reduce government spending
• Also, Encourage the unemployed to seek employment and therefore increase the labour supply

Question 6

What are interventionist policies

Answer 6

This is where the government takes intentional actions to intervene in the functioning of markets or industries with the goal of achieving specific economic or social outcomes

Question 7

5 examples of interventionist policies

Answer 7

• Nationalisation
• Direct provision
• Funding research and development (R&D)
• Training and education
• Advice, information and collaboration

Question 8

What is nationalisation (interventionist policy)

Answer 8

Involves the government taking ownership and control of private enterprises

• governments may nationalise industries for strategic, economic or social reasons

Question 9

What is direct provision (interventionist policy)

Answer 9

Where goods or services are provided directly from the government, rather than relying on market forces

• E.g. healthcare and education, or providing financial support through subsidies or welfare

Question 10

What is Research and development (R&D) (Interventionist policy)

Answer 10

Government allocating funds to support research and development activities

• This is a form of intervention aimed at promoting innovation, technological advancement and economic competitiveness

Question 11

What is training and education (interventionist policy)

Answer 11

The government invests in education and training programs

• Government intervention in education and training to improve the skills and human capital of the workforce, enhancing productivity and employability

Question 12

What is advice, information and collaboration (interventionist policy)

Answer 12

Government provides advice, information and encourages collaboration between various stakeholders

• Governments may intervene by offering guidance, information and fostering collaboration to achieve economic or social goals. This can include initiatives to support business development, promote environmental sustainability or address public health challenges

Question 13

What are the supply side policies: Market-oriented policy

Answer 13

• Tax cut
• Reduce power of labour
• A cut in unemployment benefits

Question 14

What are the supply-side policies: Interventionist policy

Answer 14

• Nationalisation
• Direct provision
• Funding Research and development (R&D)
• Training and education
• Advice, information and collaboration

Question 15

Limits of endogenous growth theory

Answer 15

• Asymmetric information, people know how much knowledge they have and their potential returns on their investments, more than the government who invests
• Doesn’t take into account demand-side policies
• Copyright regarding innovation
• Assume perfect competition, may not reflect real world markets. Other markets may affect benefits of innovation and knowledge creation
• Assumes no diminishing returns to knowledge. In reality, there might be limits to productivity gains achieved through additional investments in R&D