The main objective of the study is to know the direction of causality between economic growth and telecommunication development. Theories and empirical studies proved how the indicators of the two variables caused each other. Figure 3. Direction of causality between Economic Growth
and Telecommunication Development
increasing number of subscribers
government regulations and policies
Yt = AKt
According to Dornbusch (2003), Solow and Swan model or the ‘exogenous growth model’ is the baseline model of that measures economic growth. It is composed of three inputs; namely: capital, labor, and technology. This model is still considered unsatisfactory because of the assumption that technology is constant and as a result, all per capita variables were constant in the long run or in economics in the steady-state equilibrium. Due to the assumption ‘technology being held constant’ in the Solow-Swan model, AK model or the ‘endogenous growth model’ was developed. Where in the property of a model to have diminishing returns to capital is eliminated through a positive constant that reflects the level of technology (A). This made the production function a straight line that infers a constant marginal productivity of capital. Another component of the equation is capital and labor input (K). The change in assumption from the exogenous growth model implies for a constant returns to scale for capital. Which means that, as firm increases its production input same proportion would be the increase for the output.
Hence, this model concluded that technological progress was the reason behind economic growth. Technological progress can be in the form of increase investment in capital or in labor. But the study would only focus on the change in capital that would lead to economic growth. An example of a growth in capital is innovation. This may account...
Please join StudyMode to read the full document