Discussion
Which one of the following statements regarding Romer's Endogenous Growth model and Solow's Growth model is CORRECT?
Answer: C
The correct statement is Romer's Endogenous Growth model explains technological progress but Solow's Growth model does not.
In the Solow model the rate of technological progress is given from outside the model, so long-run growth per worker is left unexplained. Romer's model makes technology the outcome of deliberate research by profit-seeking firms, with ideas that are non-rival, so the growth of technology is determined within the model.
The returns-to-scale option reverses the models: Solow assumes constant returns to scale, while Romer's model has increasing returns in the aggregate because of non-rival ideas. Capital accumulation is endogenous in both models: in Solow it is driven by saving and depreciation within the model, so the options calling it exogenous in Solow, or in both, are wrong.
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