Cobb-Douglas, Solow-Swan, Growth and Ideas Flashcards
What three variables appear in a production function?
Capital, labour, and productivity.
Does a Cobb-Douglas function have diminishing, constant, or increasing returns to scale?
Constant.
Does a Cobb-Douglas function have diminishing, constant, or increasing returns to capital?
Diminishing.
What is the cost and benefit of each additional unit of capital?
Cost: r
Benefit: MPK
What is the term for the good used to express prices? (e.g. money, tons of apples)
The numeraire.
When will a firm stop employing more capital?
When the marginal product of capital MPK equals the rental price r.
Does a Cobb-Douglas function have diminishing, constant, or increasing returns to labor?
Diminishing.
When will a firm stop employing more workers?
When the marginal product of labor MPL equals the wage cost w.
What three variables are exogenous in Cobb-Douglas functions?
- Productivity, A
- Capital supply
- Labor supply
Why is it called a general equilibrium, not a partial equilibrium?
Partial equilibrium refers to a single market - here we are looking at multiple markets (capital, labor, etc).
What are four reasons for TFP differences across countries?
- Human capital (skills, education)
- Institutions
- Technology
- Misallocation
What is the main difference with the Solow-Swan model compared to Cobb-Douglas?
Solow-Swan endogenises capital.
_____ = ______ at Solow equilibrium.
investment, depreciation
In Solow growth, what happens when the investment rate increases?
The capital stock grows and output increases.
In Solow growth, what happens when the depreciation rate decreases?
The capital stock shrinks and output decreases.
What does the Solow-Swan model imply about long-run growth?
There is no long-run growth - capital will reach equilibrium.
What gives a larger role to TFP - Cobb-Douglas or Solow-Swan?
Solow-Swan.
The Solow equilibrium is where sY = dK - in words, this means:
The equilibrium is where investment = depreciation.
What is the essential reason for a steady state in the Solow model?
Investment has diminishing returns but depreciation is constant.
Below hitting the Solow steady state, is output rising or falling?
Rising.
Two weaknesses of the Solow model?
- Doesn’t explain long-run growth.
- TFP, more important than capital, is not explained.
The Solow-Swan model is essentially a model of _______ accumulation.
Capital.
Put the resource constraint Y = C + I into words.
Output consists of consumption and investment.
Ideas can be used and not be any more scarce - ideas are:
Nonrivalrous.
What is parameter z in the Romer model?
Productivity in regards to ideas.
Are the same stock of ideas used in the production and idea functions?
Yes, as ideas are nonrivalrous.
Are the same stock of workers used in the production and idea functions?
No, some workers are producing output, others are producing ideas.
What is lowercase L in the Romer labor allocation equation?
The percentage of the workforce that produces new ideas.
In the Solow model, output per person depends on capital per person. In the Romer model, output __________ depends on _____________.
Output per person depends on the TOTAL stock of ideas.
What is the central reason that the Romer model is able to supply a model of sustained economic growth?
The nonrivalry of ideas.
Does the Romer model exhibit transition dynamics?
No - the slope is constant.
What is the effect of a population increase in the Romer model?
Number of researchers rises, thus output increases.
What is the effect of an increase in the research share l in the Romer model?
Number of researchers rises and number of workers falls, output initially drops but then picks up faster than before.
What is the Cobb-Douglas formula for MPK?
MPK = A(L/K)^2/3
What is the Cobb-Douglas formula for MPL?
MPL = A(K/L)^1/3
