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that knowledge is a public good. The Arrow-Levhari -Shesinki model assumed that technological progress was endogenous but steady state growth was still determined by the labor force growth rate. In this model as Cass –Koopmans model, there is no government role in economic growth (Shaw 1992).

Probably because of its lack of empirical relevance, growth theory effectively died as an active research field by the early 1970s, on the eve of the rational-expectations revolution and oil shocks. For about 15 years, macroeconomic focused on short-term fluctuations. Academic interest in economic growth dwindled and major contributions gradually turned to the study business-cycle models, improved approaches to policy evolution, and the application of general-equilibrium methods to real business –cycle theory.

After the mid 1980s, the research on economic growth has regained momentum by papers of Romer (1986) and Lucas (1988). The need of determinant for long run growth inside of model (the main weakness of the neo classical growth model) is a main motivation for restart study about economic growth. Both the papers by them used the work of Arrow (1962) as a starting point, by building and improving the economic growth models. (Romer 1986; Lucas Jr 1988)

Endogenous growth models developed within the framework of inter-temporal optimizing behavior of rational agents represent different intellectual influence. These endogenous growth models achieve positive and constant steady state growth rate both assuming non-decreasing returns to scale and by endogenizing technology improvements (Lucas Jr 1988; Becker, Murphy et al. 1990; Romer 1990; Barro 1991)

Technological spillover effects resulting from investment in research and development, human capital, or technological infrastructure ensure a self-feeding growth process in the economy.

Romer (1986, 1989) assumed that knowledge operates with increasing returns and thus, even in a competitive equilibrating, there is no limit to per capita income growth. He presents a model in which economic growth in the long run occurs not because of exogenous technological progress, but because the accumulation of capital generates externalities. Externalities of knowledge form investment in research of a particular firm will raised the production possibilities of other firms as a result of inadequate patent protection. Even thought investment in research exhibits diminishing returns, the production of goods from increased knowledge demonstrates increasing returns. (Loayza and Soto 2002)

The studies that focused on the dynamic increasing returns to scale and growth include (Grossman and Helpman 1990)and (Krugman 1987). These studies suggest that large countries grow more quickly than smaller ones by exploiting their domestic markets to achieve economic of scale. With the assumption of increasing returns to scale, these models predict that higher investment rates will accelerate economic growth. Economic policies that affect the investment rate will thus have an impact on growth.

In addition to the assumption of endogens technical change and role of R&D Lucas (1988) and Romer (1990) introduces a model in which human capital plays a fundamental role in perpetuating economic growth. Returns to investment in human capital do not diminish as the economy developed and thus, human capital also exhibits increasing to scal