Exogenous Growth

Exogenous growth theory states that economic growth arises due to influences outside the economy or company of interest. Exogenous growth assumes that economic prosperity is primarily determined by factors which exist outside of the given company or economy as opposed to internal factors. Both the exogenous growth and endogenous growth theories are part of the neo-classical growth models.

The concept of exogenous growth grew out of the neoclassical growth model. The exogenous growth model factors in production, diminishing returns of capital, savings rates and technological variables to determine economic growth. The exogenous growth model differs from the endogenous growth model in that the exogenous model requires forces outside of capital investment and a growing working population to continually grow an economy. The endogenous model suggests that an economy can continue to grow indefinitely using already available items such as existing technology or investment in education.

Examples of internal (endogenous) economic factors would be capital investment, policy decisions and an expanding workforce population. External (exogenous) factors include items such as the rate of technological advancement or the savings rate. These factors are modeled by the Solow model, Ramsey model and Harrod-Domar model. To sum up these models, given a fixed amount of labor and static technology, economic growth will cease at some point as ongoing production reaches a state of equilibrium based on internal demand factors. Once this equilibrium is reached, exogenous factors are then needed to stoke growth.