Question

Suppose that z, the marginal product of efficiency units of labor, increases in the endogenous growth model. What effects does this have on the rates of growth and the levels of human capital consumption, and output? Explain your results.

Answer 1

In the endogenous growth model, the efficiency of human capital, investment in innovation and education has a pivotal role in leading to a steady state level of output. So, unlike other economic growth models which includes only labor and capital as the drivers of growth, this model takes into account development in human capital.

This talks about output per efficient worker which is exactly equat to Y/EL

where E incorporates changes in human capital

An increase in the marginal product of the efficiency of labor increases the demand for labor. This increases the wages for labor and therefore, increases the output.

However, this increase in the marginal product of efficiency of labor does not alter the rates of economic growth.

The increase will only lead to higher expansion long run paths for both consumption and output. However, these paths grow in the same direction with equal economic growth rates.

Hence, An increase in the marginal product of the efficiency of labor increases both consumption and output but does not have an impact on the economic growth rates