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The two sector endogenous growth model: an atlas

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  • Ben-Gad, M.

Abstract

In this paper we investigate the underlying structure of the Lucas (1988) endogenous growth model. We derive analytically, the restrictions on the parameter space that are necessary and sufficient for the existence of balanced growth paths and saddle-path stable local dynamics. We demonstrate that in contrast to the original model, with the addition of an external effect and depreciation in the human capital sector, the Lucas model can be made consistent with the high degrees of intertemporal elasticities of substitution increasingly estimated in the empirical literature even if there is a significant degree of increasing returns to scale in the physical production sector of the economy. Finally we demonstrate that for a given baseline rate of steady state growth, with the inclusion of modest degrees of depreciation and external effects to the human capital production process, the model can accommodate the widest possible range of economies including those characterized by low discount factors, high elasticities of intertemporal substitution, increasing returns in the final goods sector, and also both the high rates of population growth and steady state per-capita output growth we observe in many parts of the world today.

Suggested Citation

  • Ben-Gad, M., 2009. "The two sector endogenous growth model: an atlas," Working Papers 09/02, Department of Economics, City University London.
  • Handle: RePEc:cty:dpaper:09/02
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    Cited by:

    1. Zhu, Yanyuan & Feng, Xiao, 2014. "China's national production function since 1997: A reinvestigation," Working Papers in Economics 2014,2, Bundeswehr University Munich, Economic Research Group.
    2. repec:bla:rdevec:v:21:y:2017:i:3:p:874-887 is not listed on IDEAS
    3. Hosoya, Kei, 2014. "Public health infrastructure and growth: Ways to improve the inferior equilibrium under multiple equilibria," Research in Economics, Elsevier, vol. 68(3), pages 194-207.

    More about this item

    Keywords

    Two-sector endogenous growth model; intertemporal elasticity of substitution; necessary and sufficient conditions;

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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