Chapter 8 - Economics of Ideas Flashcards
Cutting Edge Growth:
Economic growth due to new ideas.
Catching Up Growth:
Economic growth due to capital accumulation.
Factors of Production Function
Y, K, eL, A, F, I, g, D, (d)
- Y = Output
- K = Physical Capital
- eL = Human Capital
- A = Ideas
- F = Function
- I = Investment
- g = Investment Rate (always 0.3)
- D = Depreciation
- (d) = depreciation rate (always 0.02)
The Solow Model Production Function
- Y = F(A, K, eL)
- If we assume that A, e, and L are constant then we can simplify our expression for out put as: Y=F(K)
- More capital (K) should produce more output
(Y) but at a diminishing rate.
Marginal Product of Capital:
- The increase in output (Y) Caused by the incremental increase in the capital (K).
Change in Output/ Change in Capital = Marginal Product of Capital
Formulas to know for each line graphed.
- Output (Y) = √K Capital
- Investment (I) = investment rate (g) x Output (Y)
- Depreciation (D) = depreciation rate (d) x Capital (K)
- Steady State level of Capital = (g/(d))^2
- Steady State level of Output = Square root of last answer
If Investment (I) > Depreciation (D), what will happen?
The capital (K) stock grows and output (Y) next period is bigger.
Y goes up, K goes up.
If Investment (I) = Depreciation (D), what will happen?
The capital stock and output are constant (the steady
state).
If Investment (I) < Depreciation (D), what will happen?
The capital (K) stock shrinks and output (Y) next period is smaller.
Y goes down, K goes down.
What is the Steady-State Level of Capital
Where the capital stock is neither increasing nor decreasing.
What is Conditional Convergence
The tendency for poorer countries to grow faster than
richer countries and thus for poor and rich countries to converge in income.
Cutting Edge Growth Function
- (A) stands for ideas that increase productivity, our production function is: Y = A √K
Better ideas or technological knowledge increases . . .
output (Y) even while holding (K) constant, that is, an increase in (A) represents an increase in productivity.
Patents increase the ___ to develop new
products, but they also increase ___.
incentive, monopoly power.
Monopoly power ___ prices and ___ the
spread of innovations throughout the economy.
raises, slows
The trade-off between creating incentives for ___&___ while avoiding too much ___ is one of the trickiest in economic policy.
Research and Development, Monopoly Power
What are Spillovers
- Non-rivalrous:
- When one person’s consumption of a good does not limit another person’s consumption.
Larger markets mean ___ incentives to
invest in research and development.
Increased
As countries become wealthier, companies will
increase their worldwide ___&___ investments.
Research and Development
New ideas are the driving force behind. . .
Long run economic growth.
Solve Steady State of Capital and Output
Capital = (investment rate/depreciation rate)^2
Output = Square root of capital steady state answer.
