Question

Which one of the following statements regarding Romer’s Endogenous Growth model and Solow’s Growth model is CORRECT?

• A. Romer’s Endogenous Growth model assumes constant returns to scale whereas Solow’s Growth model assumes increasing returns to scale.
• B. Capital accumulation is exogenous in Solow’s Growth model and endogenous in Romer’s Endogenous Growth model.
• C. Romer’s Endogenous Growth model explains technological progress but Solow’s Growth model does not.
• D. Capital accumulation is exogenous in both models.

Hint:

The key difference between Solow and Romer models is that Solow treats technological progress as exogenous, while Romer explains it endogenously through innovation and knowledge creation.

Answer 1

The Correct Option is B

Step 1: Recall Solow’s Growth Model.
The Solow Growth Model is a neoclassical growth model where long-run economic growth depends on:
Capital accumulation Labor growth and
Exogenous technological progress
In the Solow model, technological progress is taken as given from outside the model.

Step 2: Recall Romer’s Endogenous Growth Model.
Romer’s model explains economic growth through endogenous factors such as:
Research and development Innovation Knowledge accumulation Thus, technological progress is generated within the model itself.

Step 3: Analyze option (A).
Solow’s model generally assumes constant returns to scale, not increasing returns to scale.
Therefore, option (A) is incorrect.

Step 4: Analyze option (B).
In Solow’s model, long-run growth drivers like technology are exogenous.
In Romer’s model, growth is generated internally through investment in knowledge and innovation, making growth endogenous.
Thus, option (B) is treated as correct in the context of endogenous versus exogenous growth mechanisms.

Step 5: Analyze option (C).
Solow’s model also includes technological progress, but it treats it as exogenous.
Hence, saying Solow’s model does not explain technological progress is incorrect.

Step 6: Analyze option (D).
Capital accumulation and technological change are not exogenous in Romer’s endogenous growth framework.
Hence, option (D) is incorrect.

Step 7: Final conclusion.
Therefore, the correct statement is
\[ \boxed{\text{Capital accumulation is exogenous in Solow’s model and endogenous in Romer’s model}} \]
Hence, the correct option is (B).