Human capital, product quality, and growth

A growth model is developed in which finite-lived individuals invest in human capital, and investments have a positive external effect on the human capital of later cohorts. Heterogeneous labor is the only factor of production, and higher-quality labor produces higher-quality goods, Stationary growth paths, along which human capital and the quality of consumption goods grow at a common, constant rate, are studied. It is also shown that if a small economy is very advanced or very backward relative to the rest of the world, then its rate of investment in human capital is lower uuder free trade than under aurarky.