Endogenous and Exogenous Components of Economic Growth

The aim of the article is to explain the role of the main factors determining the level of economic growth in both the short and long term. The analysis concerns an open economy that is initially balanced inside and outside. It is assumed that capital investments are in balance with investments in innovation and that investments in new capital are in balance with investment replacing old capital. Unlike endogenous factors, which impact economic growth in a way similar – though not identical – to that described in the neoclassical model, exogenous factors to a large extent bear the features of multiplier interventions, which can be described with the help of a deeply modified IS-LM-BP model. In addition to long-term economic inertia and short-term multiplier impacts, there is also an immediate stimulation that needs to be considered in the model. In the article, a fundamental model is presented that, on the demand side, is based on a debt function developed according to the author’s own idea. The model also relies on a consumption function that to an extent is inspired by the rational expectations theory. As far as the supply side is concerned, the model is based on cost, revenue and profit functions inspired by R. Vernon’s theory of product life cycles. These functions are synchronized and combined into a single model, which also incorporates the formally modified IS-LM-BP model. The main conclusion from the analysis is that the contemporary economy is a heterogeneous entity. At the same time, it is market driven in the sense that it is possible not to differentiate among the different kinds of investments in the model. But the contemporary economy is also subject to impacts that are not seen as market driven under the neoclassical view.