Exploring endogenous growth through simulation

Undergraduate and master’s-level macroeconomics courses often teach economic growth using the standard exogenous growth (Solow-Swan) model, which can lead to discussions about the importance of productivity. Instructors wishing to deepen the conversation may want to discuss productivity growth sources and introduce endogenous growth models. The author of this article presents a spreadsheet-based simulation exercise of a two-sector endogenous growth model. This simulation allows students to explore an endogenous growth model without having to understand the algebraic details. Students can adjust model parameters and examine the impact on short-run and long-run levels and growth rates of output-per-worker and consumption-per-worker. Classroom discussion can then focus on economic reasoning about the importance of productivity, research into productivity, and the short-run versus long-run tradeoffs present in much of macroeconomics.