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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
Q

An equilibrium is a path (ct,kt) such that the following holds:

A

-feasibility condition
-Euler condition
-return to innovation
Initial condition ko

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26
Q

Does the economy merge to the BGP?

A

No it jumps to the BGP at the initial time

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27
Q

What does the growth rate depend on?

A

Positively depends on productivity A and the markup
Negatively depends on rho

28
Q

What is the optimal growth rate?

A

g=A-rho

29
Q

When does the economy grow too fast?

A

If the markup is too large

30
Q

Scientific knowledge

A

The current understanding of the laws of nature

31
Q

Technical knowledge

A

Techniques, methods and processes to produce goods and services. The application of the laws of nature for the benefit of humanity

32
Q

Innovation

A

Additions to the stock of technological knowledge

33
Q

Research and development

A

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
Q

Research and development

A

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
Q

How is population growth modelled?

A

No population growth

36
Q

How are preferences displayed?

A

-Preferences are logarithmic (CIES with ó=1
Integral of log(ct)e^(-rhot)

37
Q

How is a consumption good produced?

A

By the mean of a continuum of intermediate input (aka varieties)

38
Q

What is xjt?

A

The consumption of intermediate input j

39
Q

What is 1/(1-alpha)>1

A

Elasticity of substitution

40
Q

What is v>0

A

Measures the effect of the extent of product variety.
Measures the intensity of love for variety

41
Q

What is łjt?

A

Labour allocated to the production of variety j

42
Q

Describe the market for intermediate inputs and other markets

A

Market for intermediate inputs is monopolistically competitive. All other markets are perfectly competitive

43
Q

What does the representative household solve on the demand side?

A

Max the integral of xj^alpha dj
S.t
The integral of pj x xj dj

44
Q

What is the demand function?

A

xj= (alpha/lambda x pj)^(1/(1-alpha))

45
Q

How does alpha affect the equilibrium?

A

Through the demand elasticity

46
Q

What is true at a symmetric equilibrium?

A

xj=L/k

47
Q

What is c^s equal to?

A

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
Q

In aggregation what is consumption utility?

A

ct= Ac^d x c^s = Akt^v x L

49
Q

Demand for variety j is

A

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
Q

What is the equation showing how intermediate producers set quantities/prices?

A

Max profit= pjt x xjt - wt x xjt
S.t.
xjt= Bt x pjt^(1/alpha-1)

51
Q

What is the inverse demand function?

A

pjt= Bt^(1-alpha) x xjt^(alpha-1)

52
Q

In the static equilibrium what is the relative price of intermediate products (relative to the consumption goods)

A

pt= Akt

One unit of labour can produce Akt units of aggregate consumption

53
Q

What is the R&D technology of creating new varieties?

A

k(dot)t=Akt(1-Lt)

(1-Lt) is labour assigned to R&D production.
Total labour endowment is normalised to unity

54
Q

What is production technology in the consumption sector? (Shorthand)

A

ct=AktLt

55
Q

When do researchers enter the R&D sector

A

If vt x Akt >= wt

In equilibrium, innovators enter the market until vt= wt/Akt= alpha

56
Q

What are the returns to patents?

A

rt= profits/vt + v(dot)t/vt

rt= (1-alpha)/alpha x ct/kt

Dividends to value ratio and capital gains

57
Q

What is the patent value inversely related to?

A

The markup at equilibrium

58
Q

What is the equilibrium?

A

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
Q

What is the growth rate in the economy given by at equilibrium?

A

g= A-ct/kt

g= (1-alpha)/alpha x ct/kt- rho

g=(1-alpha)A- alpha x rho>0

60
Q

When does the EPV economy grow in equilibrium at a rate faster than optimal?

A

If 1/alpha > (A+ rho)/rho

Essentially if the markup is too large

61
Q

What do Bloom Et Al 2013 find?

A

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
Q

How are intermediate inputs produced?

A

Using labour (no capital)

63
Q

What is kt?

A

The number of varieties we have. Also called the mass of intermediate inputs or the state of knowledge

64
Q

What is labour used in R&D equal to?

A

1-Lt

Where 1 is total labour
And Lt is labour used in production

65
Q

What prevents private returns from equalising into social returns?

A

R&I distortions

ECON 4016 Macro Theory (8 decks)

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