New Growth Theory (Endogenous Growth)

Question 1

New growth theory states that…

Answer 1

Real GDP per capita grows because of choices that people make in the pursuit of profit and that growth can persist indefinitely

Question 2

Knowledge capital:

Answer 2

Discoveries are a public good (patents etc are artificial barriers). Returns to knowledge don’t diminish (increasing stock of knowledge makes K & L more productive)

Question 3

What is the central proposition of new growth theory?

Answer 3

Knowledge capital not experiencing diminishing returns

Question 4

Broadly, how can faster growth be achieved in the New Growth Theory?

Answer 4

Increase the growth rate of capital per hour of labour, increase the pace of technological change and encourage international trade

Question 5

How can growth of K/hour of L be increased?

Answer 5

Stimulate savings through tax incentives

Question 6

How can an increased pace of tech change be achieved?

Answer 6

Stimulate R&D through subsidises, direct finance and patents and improving the quality of education

Question 7

What is a downside of U insurance being too long?

Answer 7

People will stay unemployed until the last minute

Question 8

What is an upside of U insurance being short?

Answer 8

Strong incentive for people to search quickly for work.