Learning-by-doing and endogenous growth

Question 3: Learning-by-doing and endogenous growth [25 Marks] This question explores the idea of learning-by-doing as a source of economic growth. Consider the same production function as in Question 2: Y = K™” [AįN]l-a, (4) where, as before, Y; denotes output, Kt denotes total capital input, and N4 denotes total labour input. Capital depreciates at a rate d. The key deviation from Question 2 regarding the production side of the economy is that “knowledge” At is now proportional to the capital stock; in particular: At = BKt, (5) where B is a positive coefficient. This specification is designed to capture the idea of learning-by-doing: a greater capital stock increases the scale of production and the ex- perience (of workers, managers, etc) accumulates with production processes, making the production process itself more productive. (a) Substitute Equation 5 into Equation 4 and verify the similarity of this model to the textbook AK model.

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