Lecture 3 - Endogenous Growth Theory

Question 1

What does the Endogenous Growth Theory represent and what does it suggest

Answer 1

the transition from stagnation to growth suggests increasing returns to scale and exponential growth

This cannot be sustained in the basic Solow Model

Question 2

Definition

What is the 1st definition of technology

Answer 2

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

Question 3

Definiton

What is total factor productivity determined by

Answer 3

Total factor productivity is determined by (1) technology, which represents the knowledge about how factors of production can be combined to produce output, (2) and efficiency, which measures how effectively a given technology and factors of production are actually used

Question 4

Ideas are nonrival

Answer 4

Unlike in the Solow Model which relies on a world of rivalrous goods, ideas are nonrival since one person’s use of an idea does not precule the simultaneous use of the idea by others

But they vary substantially in their degree of excludability

Question 5

Definition

Rivarly

Answer 5

The consumption of the good by one consumer prevents simultaneous consumption by other consumers

Question 6

Definition

Excludability

Answer 6

The degree to which a good, service or resource can be limited to only paying customers

In this case copyrights or patent systems grant investors the right to charge for the use of their ideas

Question 7

What does the nonrivalry of ideas generate

Answer 7

increasing returns to scale
(and exponential growth)

for λ > 1, F(λA, λX) > λF(A,X)

if you have constant returns to scale with objects you will have increasing returns to scale to objects and ideas together

This requires the assumption that if you increase the stock of ideas then you are not going to decrease production

Question 8

What generates more ideas

Answer 8

At an aggregate level, more people generate more ideas and innovation which can be copied an infinite number of times without reducing their availability

because of their nonrivalrous they have the capability of raising everyones living standards and drive economic growth up

Question 9

Why aren’t ideas public goods

Answer 9

Even though they are nonrival they are not necessarily nonexcludable

If they were excludable then free-rider problem would arise because of the positive externalities produced and innovations would not take place

Question 10

What is the role of profit-maximising entrepreneurs and imperfect competition

Answer 10

ensure that there is profit to be made which generates incentives to innovate in the long run

longer patents aren’t good becuase people won’t want to make ideas, shorter patents hold monopoly power so no incentive to make profit

if there was no profits to gain would people still innovate: no

this suggets thatt state intervention can spur economic development

Question 11

What is the model equation

equivalent to capital accumulation equation

Answer 11

A constant fraction of s_R of the population L workers to make ideas (~R&D), so that a fraction 1- s_R works to make goods
L_A + L_Y = L and L_A = s_RL, with g_L = g_LA = g_LY = n

together L_A + L_Y equal the total population

s_R is the rate of arrival of ideas and we assume that this stays constant

Question 12

Proposition

What is the production equation

Answer 12

Y = A^σL_Y with σ> 0

return from physical inputs and ideas taken together

the degree of increasing returns to scale- abtracting from capital for simplicity purposes

Question 13

what is the growth in stock of ideas directly proportional to

Answer 13

the size of population or the share devoted to generating them
g_A = θL_AA^-β = θs_RLA^-β

with β>0 extent to which new ideas are becoming harder to find (the greater the stock of ideas the harder it will be to come up with new ones)

Question 14

Proposition

What is output per person y proportional to

Answer 14

to technology A raised to some power (y = (1-s_R)A^σ),

Proof: Production equation Y = A^σL_Y =
Y = A^σ(1-s_R)L
Then dividing through by L to get per capita is
y = (1-s_R)A^σ

Question 15

what is growth per output per person directly proportional to

Answer 15

the rate of technological progress
g_y = σg_A

Question 16

Proposition

What is technological progress equal to in the long run

Answer 16

the growth rate of the population deflated by the extent to which ideas are becoming harder to find, β
g_A = n/β

A^β tells us diminishing marginal returns

Proof:

Question 17

Proposition

What is the rate of growth of output per person in the long run

Answer 17

product of the overall degree of increasing returns in the economy, defined as γ ≡ σ/β, and the rate of population growth, n
g_y = σn/β, = γn