Non-Exponential Growth Theory

Existing endogenous growth theories typically need a knife-edge degree of externality to explain long-term growth. However, micro-level observations do not confirm such an exact degree of externality. This puzzle occurs because sustained growth has been commonly understood as exponential growth in quantity, quality, or variety of outputs. By explicitly considering the movements of price and quantity of individual goods during the product lifecycle, this paper shows that the observed stability of the long-term real GDP growth can be explained under much weaker conditions without relying on the exponential growth of any variable. In particular, we develop a new endogenous growth theory where a constant number (not exponentially many) of new goods are introduced per unit of time. Even without externality, a positive and finite GDP growth rate is maintained when the expenditure for older goods shrinks over time so as not to inhibit the expenditure share given on newer goods.