AK model

The AK model of economic growth is an endogenous growth model used in the theory of economic growth, a subfield of modern macroeconomics. In the 1980s it became progressively clearer that the standard neoclassical exogenous growth models were theoretically unsatisfactory as tools to explore long run growth, as these models predicted economies without technological change and thus they would eventually converge to a steady state, with zero per capita growth.

A fundamental reason for this is the diminishing return of capital; the key property of AK endogenous-growth model is the absence of diminishing returns to capital. In lieu of the diminishing returns of capital implied by the usual parameterizations of a Cobb–Douglas production function, the AK model uses a linear model where output is a linear function of capital. Its appearance in most textbooks is to introduce endogenous growth theory.

Origin of the concept

In neoclassical growth models the economy is assumed to reach a steady state in which all macroeconomic variables grow at the same rate and in the absence of technological progress, per capita growth of these macroeconomic variable will eventually cease. These kind of neoclassical prepositions have the resemblance with the philosophical contents in Ricardo and Malthus. The basic underlying assumption of neoclassical philosophical is that diminishing returns to capital operates in the production process.

During the mid-1980s a new beginning of growth theory launched by Paul Romer in 1986,[1] where he tried to explain the growth process in a different manner. Thus the dissatisfaction out of neoclassical model motivated to construct new growth theories where the key determination of growth theories are endogenous in the model as in these new theories, the long run growth is not determined by exogenous factors setting up endogenous growth theories.

The simplest version of endogenous model is AK models which assume constant exogenous saving rate and fixed level of technology. The stickiest assumption of this model is that production function does not include diminishing returns to capital. This means that with this strong assumption the model can lead to endogenous growth.

{\displaystyle {\frac {k(t)}{k}}=s\cdot A-n}

References

  1. ^Romer, Paul M. (1986). “Increasing Returns and Long-Run Growth”. Journal of Political Economy. 94 (5): 1002–1037. CiteSeerX 10.1.1.589.3348. doi:10.1086/261420. JSTOR 1833190

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