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Economic Growth > Endogenous Growth > Flashcards

Endogenous Growth Flashcards

1
Q

What is the definition of the term technology?

A

Technology is the way inputs to the production process are transformed into output

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2
Q

What effect do ideas have on technology of production?

A

Ideas improve technology of production.
- a new idea allows a given bundle of inputs to produce more and/or better outputs

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3
Q

What form can better ideas come on?

A
  • 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
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4
Q

What two properties do ideas have that makes them different to other economic goods?

A

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

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5
Q

Explain the costs involved in the economics of ideas

A

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

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6
Q

What does the high fixed costs and low marginal costs of ideas mean for returns to scale?

A

Ideas have increasing returns to scale

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7
Q

What further implications do the cost characteristics of ideas have?

A

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

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8
Q

What can be used to incentivise individuals to come up with new ideas?

A
  • 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
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9
Q

According to the Romer model what does the growth of ideas depend on?

A
  • depends on their being imperfect competition
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10
Q

What most individuals/firms do to sustain profits?

A
  • prevent others from using the idea through copyright, patents etc
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11
Q

What is the relationship between population and ideas?

A
  • 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
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12
Q

What is the relationship between ideas and trend (economic growth)?

A

While the number of ideas and number of researchers is climbing rapidly, trend growth in the US has remained very steady

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13
Q

Assumptions for AK model?

A
  • L=1
  • A=Abar x K * 1-alpha or alpha=1
  • growth rate of A=0
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14
Q

What is the production function in the AK model?

A

Y=AK

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15
Q

What is the growth of capital in the AK model?

A

gk=sA-delta

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16
Q

What is growth of output?

A

gY=sA-delta=gK

17
Q

What does AK model tell us?

A
  • 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
18
Q

Potential problems with AK model?

A
  • 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
19
Q

In the Romer model what is the long run growth rate of the economy determined by?

A
  • parameters of the production function for ideas (lamba and phi)
  • rate of growth of researchers which is determined by population growth rate
20
Q

What is the implication of gA in the Romer model?

A
  • 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)
21
Q

What effect do government policies (on s and sR) have on long run growth of economy in Romer model ?

A
  • 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
22
Q

What is the implication of the level effect from government policies in the Romer model?

A

Even after endogenizing technology in the model, long run growth cannot be manipulated by policymakers using conventional policies such as subsidies to R+D

23
Q

What does it mean if lamda =1 and phi=0?

A
  • 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
24
Q

Implications of lamda =1 and phi=0?

A
  • 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
25
Q

If the research effort were constant across the world over time what would happen to economic growth according to the Romer model?

A
  • economic growth would eventually grind to a halt
  • if number of researchers (population) stops growing long run growth ceases
    (In general)
26
Q

Describe case in which constant research effort can sustain long-run growth (Romer)?

A
  • Romer’s original model
  • lamda=1 and phi=1
  • gA= theta * La
27
Q

What does Romer’s special model suggest?

A
  • productivity of researchers is proportional to existing stock of ideas
  • hence productivity of researchers grows over time even if La is constant
28
Q

What is drawback of Romer’s original suggestion? (Lamda=1 and phi=1)

A
  • 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
29
Q

What is technological progress in advanced world driven by?

A

Research and development

30
Q

What does Romer tell us that original Solow doesn’t?

A
  • 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

Economic Growth (5 decks)

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