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ECON 4016 Macro Theory > 5. Expanding Product Variety > Flashcards

5. Expanding Product Variety Flashcards

1
Q

Rent spillovers

A

Rent spillovers are transfers of monopoly rents. Innovators may create new rents but they appropriate rents previously granted to other technologies

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2
Q

How do private and social gains compare for rent spillovers?

A

Since innovators don’t internalise these losses, private gains to innovation are larger than social gains

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3
Q

Business stealing

A

Better quality products fully displacing older products

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4
Q

Knowledge spillovers

A

Individual discoveries expand knowledge in general, following the emergence of subsequent discoveries. Innovators can’t appropriate the corresponding social gain so private returns to innovation < social gains

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5
Q

How do private and social gains compare for knowledge spillovers?

A

Unintended knowledge transfers means private returns are less than social returns

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6
Q

What are the two sides to creative destruction?

A

Obsolescence and rent spillovers

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7
Q

Obsolescence

A

The depreciation in value of a technology due to the emergence of a subsequent technology

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8
Q

What are the two main endogenous growth models in this section?

A

-expanding product variety model (Romer 1990)
-schumpeterian model (Aghion and Hewitt 1992)

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9
Q

In both models what is the engine of growth?

A

-Research and innovation.
-Growth is the result of profit maximising firms intentionally investing in product innovation.
-In Romer, it takes the form of new products
-Schumpeterian model, of better quality products

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10
Q

What is growth a result of in the models

A

It is the result of profit maximising firms intentionally investing in product innovation

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11
Q

In the EPVM how does growth take form?

A

In the form of new products

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12
Q

In the Schumpeterian model how does growth take form?

A

Better quality products

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13
Q

How is the state of tech represented in the EPVM?

A

By the mass of available intermediate inputs

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14
Q

How are new intermediate inputs created?

A

R&D use labour to produce them

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15
Q

How does people’s welfare change with varieties?

A

They prefer more varieties and a great mass of the varieties

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16
Q

What do we assume about the price of a consumption good?

A

That it is one (numeraire)

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17
Q

Does Bt depend on j?

A

No

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18
Q

Across intermediate inputs what is demand elasticity equal to?

A

The elasticity of substitution

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19
Q

How is the mark up represented in the equations?

A

1/alpha where alpha determines the amount of variety- lower alpha means more variety

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20
Q

What does the markup depend on?

A

Negatively depends on the elasticity of substitution which is equal to the elasticity of demand

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21
Q

Why is the equilibrium symmetric? (Prices and quantities are equal across products)

A

Because the market is perfectly competitive

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22
Q

How many units of intermediate inputs and units of aggregate consumption can one unit of labour produce?

A

1 unit of intermediate inputs
Akt units of aggregate consumption

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23
Q

What can innovators use a patent for?

A

Produce a variety
Sell it at price vt

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24
Q

What are returns to patents positively related to?

A

Markups and size of market

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25
An equilibrium is a path (ct,kt) such that the following holds:
-feasibility condition -Euler condition -return to innovation Initial condition ko
26
Does the economy merge to the BGP?
No it jumps to the BGP at the initial time
27
What does the growth rate depend on?
Positively depends on productivity A and the markup Negatively depends on rho
28
What is the optimal growth rate?
g=A-rho
29
When does the economy grow too fast?
If the markup is too large
30
Scientific knowledge
The current understanding of the laws of nature
31
Technical knowledge
Techniques, methods and processes to produce goods and services. The application of the laws of nature for the benefit of humanity
32
Innovation
Additions to the stock of technological knowledge
33
Research and development
Set of activities aimed to improve the actual state of technological knowledge. R&D is a production process transforming R&D inputs into innovation outputs
34
Research and development
Set of activities aimed to improve the actual state of technological knowledge. R&D is a production process transforming R&D inputs into innovation outputs
35
How is population growth modelled?
No population growth
36
How are preferences displayed?
-Preferences are logarithmic (CIES with ó=1 Integral of log(ct)e^(-rhot)
37
How is a consumption good produced?
By the mean of a continuum of intermediate input (aka varieties)
38
What is xjt?
The consumption of intermediate input j
39
What is 1/(1-alpha)>1
Elasticity of substitution
40
What is v>0
Measures the effect of the extent of product variety. Measures the intensity of love for variety
41
What is łjt?
Labour allocated to the production of variety j
42
Describe the market for intermediate inputs and other markets
Market for intermediate inputs is monopolistically competitive. All other markets are perfectly competitive
43
What does the representative household solve on the demand side?
Max the integral of xj^alpha dj S.t The integral of pj x xj dj
44
What is the demand function?
xj= (alpha/lambda x pj)^(1/(1-alpha))
45
How does alpha affect the equilibrium?
Through the demand elasticity
46
What is true at a symmetric equilibrium?
xj=L/k
47
What is c^s equal to?
c^s= (1/kt integral of xjt^(alpha) x dj)^(1/alpha) x kt= L Consumption utility c^s aggregated into a linear function of L
48
In aggregation what is consumption utility?
ct= Ac^d x c^s = Akt^v x L
49
Demand for variety j is
xjt= Bt x pjt^(1/alpha-1) Notice Bt doesn’t depend on j The demand elasticity is equal to the elasticity of substitution across intermediate inputs
50
What is the equation showing how intermediate producers set quantities/prices?
Max profit= pjt x xjt - wt x xjt S.t. xjt= Bt x pjt^(1/alpha-1)
51
What is the inverse demand function?
pjt= Bt^(1-alpha) x xjt^(alpha-1)
52
In the static equilibrium what is the relative price of intermediate products (relative to the consumption goods)
pt= Akt One unit of labour can produce Akt units of aggregate consumption
53
What is the R&D technology of creating new varieties?
k(dot)t=Akt(1-Lt) (1-Lt) is labour assigned to R&D production. Total labour endowment is normalised to unity
54
What is production technology in the consumption sector? (Shorthand)
ct=AktLt
55
When do researchers enter the R&D sector
If vt x Akt >= wt In equilibrium, innovators enter the market until vt= wt/Akt= alpha
56
What are the returns to patents?
rt= profits/vt + v(dot)t/vt rt= (1-alpha)/alpha x ct/kt Dividends to value ratio and capital gains
57
What is the patent value inversely related to?
The markup at equilibrium
58
What is the equilibrium?
It is a path such that the following hold -feasibility condition k(dot)t= Akt- ct -Euler equation c(dot)t/ct= rt- rho -return to innovation rt=(1-alpha)/alpha x ct/kt -initial condition k0
59
What is the growth rate in the economy given by at equilibrium?
g= A-ct/kt g= (1-alpha)/alpha x ct/kt- rho g=(1-alpha)A- alpha x rho>0
60
When does the EPV economy grow in equilibrium at a rate faster than optimal?
If 1/alpha > (A+ rho)/rho Essentially if the markup is too large
61
What do Bloom Et Al 2013 find?
Using US firm level panel data, knowledge spillovers quantitatively dominate rent spillovers so that the social returns to R&D are at least twice as high as private returns
62
How are intermediate inputs produced?
Using labour (no capital)
63
What is kt?
The number of varieties we have. Also called the mass of intermediate inputs or the state of knowledge
64
What is labour used in R&D equal to?
1-Lt Where 1 is total labour And Lt is labour used in production
65
What prevents private returns from equalising into social returns?
R&I distortions

ECON 4016 Macro Theory (8 decks)

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