Question 1

How is the endogenous growth model different from the exogenous growth model?

Accepted Answer

technology is assumed to be a function of other variables. This will equate to technology being related to the production of ideas in the economy; it is the result of purposeful research and development (R&D) activity. Put another way, technology will no longer be assumed to grow according to the process At = A0egt (where g is the growth rate of technology, and t denotes the time period).

Question 2

How did Solow (1956) and MRW (1992) deal with technology?

Accepted Answer

Recall that in the exogenous growth models of Solow (1956) and Mankiw, Romer and Weil (1992), technology growth was assumed to follow this (exponential) process. Adding exogenous technical progress to a simple Solow model leads to the prediction that in the steady-state, output per worker (yt = Yt/Lt) will grow over time. This prediction is consistent with the empirical (i.e., real-world) observation that for most countries, GDP per capita has grown over time. What MRW found is that adding human capital to a Solow model with technology is very effective in accounting for cross-country differences in economic growth. This naturally raises the issue of what can be gained from introducing endogenous technological progress into a theoretical model. If models with exogenous technological progress can explain many of the stylised facts of long-run economic growth, what is the point, for instance, of endogenising technological progress?

Question 3

How long has the idea of endogenous technological progress been around?

Accepted Answer

The notion of endogenous technological progress has been around for some time. From a policymaking perspective, it is an appealing idea if one applies the following line of reasoning: if the growth rate of technological progress plays an important role in determining the growth rate of output per worker ( y(dot) /y ), and we can determine the economic factors that drive At, this will allow governments to enact policies that affect these economic factors, thereby increasing y(dot) /y. This ultimately holds the implication that our living standards will increase over time

Question 4

How do you derive the AK model and what can we learn from it?

Accepted Answer

Consider a special case of a production function Y = AKaL1-α . Setting the capital share parameter, α, equal to one implies that Y = AKaL1-α reduces to Y = AK, hence the name 'AK model'. In this model, let's assume no technological progress, such that the parameter A is a constant: it does not evolve over time, and measures the amount of output produced for each unit of capital. The marginal product of capital is dY /dK = A. In other words, is it constant, and not characterised by diminishing returns to scale as would be the case in the'standard' setting where 0 \< α \< 1. Some economists argue that assuming constant returns here is realistic if one assumes that K encompasses knowledge in addition to just physical capital. Knowledge is an important input into production, and it seems plausible to assume that it is not subject to diminishing returns.

Question 5

What are some further implications of the basic AK model?

Accepted Answer

We can answer this question by finding the growth rate of Y , through taking logs then derivatives of Y = AK with respect to time. This will imply that Y(dot) /Y = K(dot) /K: put another way, the growth rate of output will be equal to the growth rate of capital. Prima facie, this result seems pretty innocuous. So what more can be said about K(dot)/K.

Question 6

What do we assume the equation of motion is for the basic AK model?

Accepted Answer

K(dot)= sY - 𝛿K If all savings (s) are channelled to investment, and there is no population growth (let's assume L = 1, which implies that there is no difference between output per se and output per worker) dividing by K yields K(dot)/k= sY/K - 𝛿 Thus Y(dot)/Y = A - 𝛿: δ: ceteris paribus, an increase in the saving rate leads to a permanently higher growth rate. It turns out that if we allow for population growth too, the result does not change Output per worker will grow at the rate y(dot)/y= sA - (𝛿+n) , where n is the population growth rate. The significant point here, however, is that output per worker will grow endogenously, with no role for technological progress and will be driven by the equation of motion k(dot) = sAk - (𝛿+n)k, where k = K/L

Question 7

How does the Arrow model build upon the AK model?

Accepted Answer

So, how does the 'learning by doing' model of Arrow fit in here? The Arrow model is a special form of AK model which assumes that in the production function Y = BKαL1-α , B is an endogenous parameter which determines the amount of output produced given the modelís inputs. If B is accumulated endogenously, it implies that overall, production is characterised by increasing returns to scale. The key assumption here is that B captures knowledge about the economy, which is generated as a result of capital accumulation by firms.

Question 8

What does the relationship B=AKα say?

Accepted Answer

B will grow as K gets larger, where the parameter A is a positive constant. Here, capital accumulation leads to new knowledge, which is an unintended consequence of the production process. This is because firms only accumulate capital because it is a useful production input. This process is called learning by doing

Question 9

What is the short-coming of Arrow's model?

Accepted Answer

knowledge is produced unintentionally, and in practice, the search for knowledge is due to purposeful efforts. This is acknowledged in the work of Paul Romer, who in the 1980s developed models of endogenous growth in which technological progress was driven by the (purposeful) production of ideas and innovation

Question 10

What view does Charles Jones hold about R & D?

Accepted Answer

Charles Jones holds the view that R&D is not merely an accidental spillover from the capital accumulation process (this explains why it is given such brief treatment in his textbook). He believes that it is more likely that 'knowledge accumulation is...the desired outcome of entrepreneurial effort rather than an accidental by-product of some other activity' (Jones, p.163). Saying this, it does not mean that the notion of externalities playing some role in the knowledge generation process is totally nonsensical (consider Isaac Newton's remark about 'standing on the shoulders of giants'). We therefore want to consider a model where R&D is a result of conscious e§ort to innovate by firms

Question 11

What does Jones highlight the role of copyright and patent systems?

Accepted Answer

Here, Jones highlights the role of copyright and patent systems in granting inventors who receive copyrights or patents the right to charge for the use of their ideas. This issue raises another important point. Unless intellectual property rights are protected, the incentive to innovate may diminish. After all, what is the point of innovating if oneís blueprints for inventions and ideas can be copied by others? Intellectual property theft may also have other significant economic ramifications

Question 12

What was one of the main drivers of the trade war between the US and China in 2018?

Accepted Answer

One of the main drivers of the trade war beginning in 2018 between the US and China is the latterís alleged theft of US firm's intellectual property on a massive scale. This type of behaviour would clearly provide competitor forms with an unfair advantage (e.g., such forms would not have to invest the vast sums required for R&D), and according to the Commission on the Theft of American Intellectual Property in 2018, cost the US economy $600 billion per year (this figure is at the higher end of estimated losses).

Question 13

How are ideas tied to the presence on increasing returns to scale and imperfect competition?

Accepted Answer

In the former case, this is attributable to a high fixed cost of developing the product, and a constant marginal cost of producing units of the product once it is fully developed. Consider the creation of software, and its subsequent production in the form of CDs given by the simple production function y = f (x) = 100\ (x -F ) where y is the number of copies of the software produced, F is the fixed cost of developing the software (measurable in hours), and x is the number of input hours required to produce the software. F \< x implies that the number of outputs (CDs) produced will be negative. This is obviously impossible. To produce the first CD required a tremendous amount of input F (F + 1/100 units). After this, mass production may be cheap.

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L15 - Endogenous Growth Theory Flashcards

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