Chapter 8 - Economics of Ideas

Question 1

Cutting Edge Growth:

Answer 1

Economic growth due to new ideas.

Question 2

Catching Up Growth:

Answer 2

Economic growth due to capital accumulation.

Question 3

Factors of Production Function

Y, K, eL, A, F, I, g, D, (d)

Answer 3

• 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)

Question 4

The Solow Model Production Function

Answer 4

• 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.

Question 5

Marginal Product of Capital:

Answer 5

• The increase in output (Y) Caused by the incremental increase in the capital (K).

Change in Output/ Change in Capital = Marginal Product of Capital

Question 6

Formulas to know for each line graphed.

Answer 6

• 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

Question 7

If Investment (I) > Depreciation (D), what will happen?

Answer 7

The capital (K) stock grows and output (Y) next period is bigger.
Y goes up, K goes up.

Question 8

If Investment (I) = Depreciation (D), what will happen?

Answer 8

The capital stock and output are constant (the steady
state).

Question 9

If Investment (I) < Depreciation (D), what will happen?

Answer 9

The capital (K) stock shrinks and output (Y) next period is smaller.
Y goes down, K goes down.

Question 10

What is the Steady-State Level of Capital

Answer 10

Where the capital stock is neither increasing nor decreasing.

Question 11

What is Conditional Convergence

Answer 11

The tendency for poorer countries to grow faster than
richer countries and thus for poor and rich countries to converge in income.

Question 12

Cutting Edge Growth Function

Answer 12

• (A) stands for ideas that increase productivity, our production function is: Y = A √K

Question 13

Better ideas or technological knowledge increases . . .

Answer 13

output (Y) even while holding (K) constant, that is, an increase in (A) represents an increase in productivity.

Question 14

Patents increase the ___ to develop new
products, but they also increase ___.

Answer 14

incentive, monopoly power.

Question 15

Monopoly power ___ prices and ___ the
spread of innovations throughout the economy.

Answer 15

raises, slows

Question 16

The trade-off between creating incentives for ___&___ while avoiding too much ___ is one of the trickiest in economic policy.

Answer 16

Research and Development, Monopoly Power

Question 17

What are Spillovers

Answer 17

• Non-rivalrous:
• When one person’s consumption of a good does not limit another person’s consumption.

Question 18

Larger markets mean ___ incentives to
invest in research and development.

Answer 18

Increased

Question 19

As countries become wealthier, companies will
increase their worldwide ___&___ investments.

Answer 19

Research and Development

Question 20

New ideas are the driving force behind. . .

Answer 20

Long run economic growth.

Question 21

Solve Steady State of Capital and Output

Answer 21

Capital = (investment rate/depreciation rate)^2

Output = Square root of capital steady state answer.