Where Y represents the total production in an economy, A represents the productivity factor (often generalized as technology), K is he capital and L is the labor. Despite its simplicity and the model gave the first insights in the importance of technological progress in the process of economic growth through the productivity factor, since a technological improvement which would increase A would eventually lead the economy to a higher level of output. Due to the disadvantages of Solow’s model and the need for a more {{{{effective}}}} theory explaining growth in the long run and technological progress, the endogenous growth theory were developed in the 1980s. Romer (1986) based on microeconomic assumptions, households maximizing utility and firms maximizing profits, built macroeconomic models introducing technological progress and human capital – the skills and knowledge that make the labor force productive – which contrary to physical capital has increased rates of return. This model gave to policy makers for the first time the theoretical framework in order to influence long run growth rates depending on the type of capital they wanted to invest in. Lucas (1988), Grossman and Helpman and Aghion and Howitt (1992) developed this idea further by including innovation and...

Where Y represents the total production in an economy, A represents the productivity factor (often generalized as technology), K is he capital and L is the labor. Despite its simplicity and the model gave the first insights in the importance of technological progress in the process of economic growth through the productivity factor, since a technological improvement which would increase A would eventually lead the economy to a higher level of output. Due to the disadvantages of Solow’s model and the need for a more {{{{effective}}}} theory explaining growth in the long run and technological progress, the endogenous growth theory were developed in the 1980s. Romer (1986) based on microeconomic assumptions, households maximizing utility and firms maximizing profits, built macroeconomic models introducing technological progress and human capital – the skills and knowledge that make the labor force productive – which contrary to physical capital has increased rates of return. This model gave to policy makers for the first time the theoretical framework in order to influence long run growth rates depending on the type of capital they wanted to invest in. Lucas (1988), Grossman and Helpman and Aghion and Howitt (1992) developed this idea further by including innovation and...