Service Good as an Intermediate Input and Optimal Government Policy in an Endogenous Growth Model

Abstract

The present article considers an endogenous growth model in which the service output is used as intermediate good in commodity sector, tax is imposed on manufacturing product and the revenue earned is invested to create human capital. It is shown that there exists a unique, saddle path stable steady-state growth rate of human capital accumulation and a unique growth-maximizing tax rate. The optimal tax rate for the command economy is compared with growth-maximizing tax rate in competitive economy. A numerical analysis shows that the command economy will have a higher growth rate than the competitive economy. An extension of the model where households privately spend for accumulation of human capital yields the same growth rate as that of the command economy of the previous model. JEL Classification: E6, H2, O4

Government Size and Economic Growth: An Empirical Examination of Selected Emerging Economies

“…Government (spending) size, which is expressed here forth as the ratio of government spending to GDP (in %), exercises both negative and positive effects on the economic growth of a nation. Different viewpoints could be summarized into three main differing associations: first, these economists uphold that the government (public) spending and economic growth move hand-in-hand; second, school supports the negative linkage between the government size and economic growth; and the third, viewpoint argues that this linkage between government (spending) size and growth may possibly be non-linear (curvilinear) vis-a-vis linear linkage (Chen & Lee, 2005; Gupta et al, 2019; Martins & Francisco, 2014; Thanh, 2015). The neoclassical economists such as Solow (1956) proposed an economic model where an alteration in fiscal (government) policy has a level but without growth effect in the long run (like an increase in public spending in general).…”