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 the Solow model.
In Solow's model growth comes from capital, labour and technology, but the technology improvement is taken as given from outside. So it is exogenous there.

Step 2: Recall the Romer model.
Romer builds growth from inside, through research, innovation and the spread of knowledge. So in his model the engine of growth is endogenous.

Step 3: Check option A.
Solow usually assumes constant returns to scale, not increasing returns. So A is wrong.

Step 4: Check option B.
The long run growth driver is exogenous in Solow and endogenous in Romer. This is the heart of the difference, so B is the correct statement.

Step 5: Knock out C and D.
Solow does include technical progress, just from outside, so C is wrong. Romer's growth is not exogenous, so D is wrong.
\[ \boxed{\text{Exogenous in Solow, endogenous in Romer}} \]