5.3 Increasing returns to scale Consider a growth model with the following production function: Y = KT(ALY). Here we do not impose any assumptions about

5.3 Increasing returns to scale Consider a growth model with the following production function:

Y = KαTβ(ALY)μ.

Here we do not impose any assumptions about the magnitudes of the exponents; their sum may be smaller than, equal to, or larger than unity.

As in the previous models the capital–output ratio is constant in the long run, so Y

K

= Kα−1Tβ(ALY)μ

is constant. Use this to derive expressions for the long-run growth rates of Y and y. Explain how increasing returns may be a “substitute” for technological progress.