The Theory of Growth

This chapter reviews the theory of growth. As motivation, it first discusses a range of related facts, including structural change and facts on the ‘new economy. It then launches into the Solow Growth Model (SMG) and related issues. The question of convergence, growth/development accounting, and the world income distribution are discussed next. The later part of the chapter discusses Endogenous Growth Theory(ies) (EGT). After offering an intuitive discussion of the limitations of SMG that EGT aims to rectify, the chapter reviews the AK model, including the processes that underpin it and its properties, and human capital, including its two-sector formulation. Newer EGT models are then reviewed, including models based on expanding product variety and those based on improving quality and product replacement (‘creative destruction’). The chapter concludes with evidence, the policy implications of EGT, and directions of current research.