A Closer Look at the Theory of Growth

The theory of growth focuses on two types of growth. One type of growth is called endogenous growth, which assumes a constant marginal product of capital at the aggregate level and does not tend to zero. It also does not assume that larger firms are more productive than small ones. Endogenous growth models can have perfect competition or some degree of monopoly power, often from patents. They are based on two distinct sectors: the primary sector, and the secondary sector.

Exponential growth

Exponential growth is a theory that states that an increase in population occurs with increasing rate. The rate of growth is equal to the number of units divided by time t. This theory can be illustrated with bacterial colonies. One bacterium can multiply into two, which in turn will split into four, eight, sixteen, and so on. This growth rate continues to increase proportional to the number of bacteria. This theory is applied to real-world phenomena as well, such as viral videos. It must be noted that the initial exponential growth does not always continue indefinitely, and often stops because of upper limits. The exponential growth eventually reaches its apex, and may change into logistical growth or a natural disaster.

To apply the theory, start with a starting value and compare the growth rate to the exponential growth rate. For example, let’s assume you have an app that has been around for a year and has acquired 500 users. Then, in the second year, you acquire 10 more users. Another year, you acquire fifty new users and the third year, you have 550 users. After five years, your app will have 550 users.

Endogenous growth

The Endogenous Growth Theory holds that economic growth is largely the result of endogenous forces. Investment in knowledge, innovation, and human capital are major contributors to economic growth. In addition to these factors, economic growth is a function of the way humans are organized and trained. However, there is a large difference between these theories. There are some common characteristics. Here’s a closer look at each. Listed below are some of the most important ones.

The theory is based on the fact that productivity increases are related to faster innovation and investment in human capital. Therefore, endogenous growth economists emphasize the need for strong government and private sector institutions and incentives for innovation. Endogenous growth economists believe that productivity improvements are tied to faster innovation. Therefore, they advocate for policies to foster innovation and creativity. This theory also holds that technological innovations are important factors in economic growth. It is important to keep in mind that the endogenous growth theory has some flaws.

Keynesian demand-side growth theory

Keynesian demand-side growth theory says that the primary economic driver is demand for goods and services. As such, government policy is focused on direct interventions to encourage demand and prevent recession. According to Dan North, chief economist at Euler Hermes, a key aspect of this theory is that governments should increase spending to stimulate demand. However, these efforts do not result in growth. Keynesian economists argue that government spending should be tempered with fiscal responsibility.

Another key point of this theory is that wages and prices cannot go lower without causing firms to go out of business. When wages are lower than the price of a good or service, they tend to reduce their prices to stimulate aggregate demand. But when demand reaches Y*, this downward pressure on wages ceases. This is due to the fact that nominal rigidity prevents the economy from reaching Y* quickly.

Natural growth rate

The Natural Growth Rate (NGR) is a measure of the pace at which a company is growing. It accounts for both organic signups and incremental recurring revenue that began in the product without sales involvement. Let’s say that a SaaS company is growing at a rate of 120% per year. Approximately 90% of new signups are organic, and 100% of new customers are acquired without sales involvement. This would translate to a NGR of 108%. You can calculate this metric by using a free analytics tool like Klipfolio PowerMetrics.

In 2016, the U.S. Census Bureau estimated that deaths and births in the country totaled 10 per thousand people. Net migration contributed an additional 0.4% to the overall population growth rate. While this increase might seem high, it still is well below the natural growth rate. Therefore, the Natural Growth Rate theory still makes sense. A population growth rate of 2% is not too far off from what we see today. So, we can use the data to determine whether natural increases and net migration have a positive or negative impact on a country’s population.


Inequality and growth are closely related, and in fact, high inequality is correlated with lower growth. On the other hand, lower inequality is associated with stronger growth and a greater middle class. However, some studies show that higher inequality may actually stimulate growth in the short term. As a result, it may be advantageous to create more equal societies. But how do we know if the relationship between inequality and growth is causal?

A critical point to keep in mind is that the growth-inequality literature is a patchwork of different concepts. Some contributions discuss vertical income inequality, others talk about horizontal wealth inequality, and still others focus on the inequal distribution of education and credit. While these approaches all have the same goal, they do not give policy makers a clear picture of the mechanisms behind this relationship. The best we can hope for is a better understanding of how inequality affects growth and what policy instruments may be beneficial.

Spillover effects

Growth spillover effects are economic phenomena that occur when an intervention generates beneficial outcomes for agents/units that were not originally intended. These effects vary based on the type of agents/units and the extent to which they resemble the desired outcome. However, the impact of South African growth on the rest of Africa is statistically significant. This study provides further evidence that South Africa is a vital growth engine for the African continent. Other African countries do not contribute significantly to the continent’s growth.

In general, the size of the spillover effect depends on the relative income level of the countries involved. If the ratio is large, then a country will grow slower than a country with a smaller income gap. On the other hand, if a country trades with richer countries, it will grow faster. This is because of the larger knowledge stock that developed trading partners have. This theory is consistent with observations from economics and finance.