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AK Model

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33 views3 pages

AK Model

Uploaded by

aditidocmoc
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Study Notes

Endogenous Growth - AK
Model
AK Model

Introduction

 The new growth theory provides a theoretical framework for analyzing persistent growth of
output that is determined within the system governing the production process.
 This is done either by avoiding diminishing returns to capital or by explaining technical
change internally.
 In the new growth theory models, there exist technological spillovers, externalities and
increasing returns to scale.
 They do not expect convergence; they rather accept the fact that disparities along countries
can persist or even enlarge.
 They emphasize on the importance of investments in human capital and potential gains from
technology improvements - inventions and innovations.
 The simplest and basic model of endogenous growth is the AK model.
 This model is important since other endogenous growth models can be thought of as
extensions or micro foundation of the basic one.

The Basic AK Model

 The AK model is the simplest possible endogenous growth model.


 The production function is assumed to be linear in the only input capital.

Yt= f(k) =AK


Where, A = an exogenous constant which reflects the level of technology
K = the aggregate capital broadly defined

 The production of function displays both constant returns to scale and constant returns to
capital. (Solow model assumed diminishing returns to capital. The inexistence of diminishing
return to capital is the key difference between the AK model and the Solow model)
 Assume that a certain fraction of income is saved and invested, which remains constant (s).
 The capital accumulation equation can be written as

i.e., change in capital stock equals investment (sY) minus depreciation (δ K).

(because Y/K = A)
we can write after a little re-arrangement of terms,

ΔY
 This equation shows the growth rate of output ( ) and states that as long as sA > δ , the
Y
economy's output / income grows forever, without the assumption of exogenous technical
progress.

2
AK Model

Results of AK Model

1. The model allows for growth in output at a rate determined by (sA - δ ).


2. Higher saving s, higher level of technology A and lower level of depreciation δ have positive
effects on the growth rate of output.
3. The model does not exhibit any convergence; it rather accepts divergence.
4. There exist no transitional dynamics: the growth rate jumps instantaneously whenever there
is a change in parameter value.

A Critical Appraisal

The AK model cannot be considered as a complete model since all the results are based on the
assumption of constant returns to capital. It leaves unexplained why there are no diminishing
returns to capital. However, the AK model highlights the key component required for any model
of endogenous growth, i.e., there must be constant returns to the factor (or factors) that can be
accumulated.

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