Exogenous growth model

The notion of growth as increased stocks of capital goods (means of production)
was codified as the Solow-Swan Growth Model, which involved a series of
equations which showed the relationship between labor-time, capital goods,
output, and investment. In this modern view, the role of technological change
became crucial, even more important than the accumulation of capital. This
model, developed by Robert Solow and Trevor Swan in the 1950s, was the
first attempt to model long-run growth analytically. This model assumes that
countries use their resources efficiently and that there are diminishing returns
to capital and labor increases. From these two premises, the neo-classical model
makes three important predictions. First, increasing capital relative to labor
creates economic growth, since people can be more productive given more capital.
Second, poor countries with less capital per person will grow faster because
each investment in capital will produce a higher return than rich countries with
ample capital. Third, because of diminishing returns to capital, economies will
eventually reach a point at which no new increase in capital will create
economic growth. This point is called a "steady state".
The model also notes that countries can overcome this steady state and continue
growing by inventing new technology. In the long run, output per capita depends
on the rate of saving, but the rate of output growth should be equal for any
saving rate. In this model, the process by which countries continue growing
despite the diminishing returns is "exogenous" and represents the creation of
new technology that allows production with fewer resources. Technology improves,
the steady state level of capital increases, and the country invests and grows.
The data does not support some of this model's predictions, in particular, that
all countries grow at the same rate in the long run, or that poorer countries
should grow faster until they reach their steady state. Also, the data suggests
the world has slowly increased its rate of growth.