Endogenous Growth Flashcards
What is the definition of the term technology?
Technology is the way inputs to the production process are transformed into output
What effect do ideas have on technology of production?
Ideas improve technology of production.
- a new idea allows a given bundle of inputs to produce more and/or better outputs
What form can better ideas come on?
- productivity improvements I.e more output using same inputs
- new and/or different outputs from same inputs
- organisational improvements I.e more efficient production and distribution lines
What two properties do ideas have that makes them different to other economic goods?
Non-rival: one persons use of an idea doesn’t effect another’s use
- produce an idea once and then anyone can use ot
Non-exclusive: generally cannot prevent others from using ideas
- patents and copyrights used to increase excludability
Explain the costs involved in the economics of ideas
Ideas have high fixed costs
- initial investment to invent/materialise idea is substantial
Ideas have very low marginal costs
- once idea is materialised it costs very little to reproduce
What does the high fixed costs and low marginal costs of ideas mean for returns to scale?
Ideas have increasing returns to scale
What further implications do the cost characteristics of ideas have?
P > MC - inefficient but necessary
- this is because AC > MC due to very high initial fixed cost
- if inventors/companies set P=MC they would make negative profits and there would no incentive to invest initial time in the first place
What can be used to incentivise individuals to come up with new ideas?
- profits they can expect to earn (why P>MC is necessary)
- they must be able to recuperate initial investment otherwise they will not invest
- parents and copyright can create monopoly for specific company/individual so they can recuperate greater reward
According to the Romer model what does the growth of ideas depend on?
- depends on their being imperfect competition
What most individuals/firms do to sustain profits?
- prevent others from using the idea through copyright, patents etc
What is the relationship between population and ideas?
- higher population means there are more potential innovators and in general more ideas being produced
- since ideas are non-rival, unlike capital, means that as number of people increases resources aren’t spread thinner
- everyone can use same idea
What is the relationship between ideas and trend (economic growth)?
While the number of ideas and number of researchers is climbing rapidly, trend growth in the US has remained very steady
Assumptions for AK model?
- L=1
- A=Abar x K * 1-alpha or alpha=1
- growth rate of A=0
What is the production function in the AK model?
Y=AK
What is the growth of capital in the AK model?
gk=sA-delta
What is growth of output?
gY=sA-delta=gK
What does AK model tell us?
- government policies that increase the investment rate will permanently increase the growth of the economy
- constant returns to the accumulation of capital
- transition dynamics never end and AK model generates growth endogenously
Potential problems with AK model?
- relies on very specific assumptions
L=1 - unlikely capital share is that high (alpha=1) as on reality is closer to 1/3 and even combining physical and human capital = 2/3
In the Romer model what is the long run growth rate of the economy determined by?
- parameters of the production function for ideas (lamba and phi)
- rate of growth of researchers which is determined by population growth rate
What is the implication of gA in the Romer model?
- long run growth rate of technology is not influenced by government policies that affect investment rate or changes to share of those exploited in R+D (sR)
What effect do government policies (on s and sR) have on long run growth of economy in Romer model ?
- the temporarily increase growth rate of technology while economy transitions from one steady to state to the other
- no effect on long run growth rate
- permanently affects level of technology
What is the implication of the level effect from government policies in the Romer model?
Even after endogenizing technology in the model, long run growth cannot be manipulated by policymakers using conventional policies such as subsidies to R+D
What does it mean if lamda =1 and phi=0?
- productivity of researchers is constant
- there I no duplication of ideas, productivity of researcher today is independent of stock of ideas
- gA= theta * LA / A
Implications of lamda =1 and phi=0?
- growth rate of stock of ideas falls over time approaching zero
- growth never ceases
- in order to generate exponential growth number of new ideas must be expanding over time
- this can only occur is number of researchers is increasing I.e. because of world population growth
If the research effort were constant across the world over time what would happen to economic growth according to the Romer model?
- economic growth would eventually grind to a halt
- if number of researchers (population) stops growing long run growth ceases
(In general)
Describe case in which constant research effort can sustain long-run growth (Romer)?
- Romer’s original model
- lamda=1 and phi=1
- gA= theta * La
What does Romer’s special model suggest?
- productivity of researchers is proportional to existing stock of ideas
- hence productivity of researchers grows over time even if La is constant
What is drawback of Romer’s original suggestion? (Lamda=1 and phi=1)
- world research effort has increased enormously
- Since La is growing rapidly over time, original Romer model would predict the growth rates of advanced economies should have also risen rapidly over the same period
- data shows steady growth in advanced economies despite increased research effort
What is technological progress in advanced world driven by?
Research and development
What does Romer tell us that original Solow doesn’t?
- Romer model includes explanation for how technology grows over time
- uses production function for ideas with R+D as input to generate gA
- from solow we know technology is main driver of economic growth
- Solow assumed technology was exogenous and grew at gA
