Romer's Long Run Growth Model

Question 1

What are some key principles of the Romet Model of Endogenous Growth?

Answer 1

• IDEAS underpin longrun growth
• Ideas are new methods of using existing models

Question 2

What are some key properties of ideas?

Answer 2

• Ideas are non-rival, meaning that the consumption of ideas does not limit their use
• Ideas involve increasing returns to scale, therefore lead to issues of the invisible hand
• EXAMPLES: Recipies, Blueprints, Technology –> Use factors of production

Question 3

What are constant Returns to Scale?

Answer 3

• Constant Returns to Scale shows that the average product [Output/Costs] per dollar spent is constant. Standard replixation argument implies CRS
• Increasing Returns to Scale: Average Production per dollar spent is rising as production rises. High fixed initial costs leads to IRSHo

Question 4

How can you prove IRS?

Answer 4

• If the production function > Y/X; then there is IRS
• Assume a C.D production function, Y=F(K,L,A) multiplied by γ (where γ>1)- this means:
• γY = γAt + γKt^α + γLt^(1-α)
• Open the brackets on the power and collect γ term to find:
• γY = γ² [AtKt^αLt^(1-α)]
• As γ²>γ; there is IRS

Question 5

What are the issues with competition presented by ideas?

Answer 5

• Invisible hand theorem: Perfectly competitive markets lead to pareto optimal allocation, meaning that you cannot make abyone better off without someone worse off
• The paretoly efficient level must be P=MC=MB. At this level, no firm will be willing to invest, as they would never need this [MC is low due to reusability]

Question 6

How can you solve issues that ideas create?

Answer 6

• Patents, Prizes and Funding
• Patents grant monopolies power over a good gor a period of time. This genrates postivie profits and creates sufficient incentives- BUT: P>MC, resulting in a welfare loss

Question 7

Name the equation for the Romer Model

Answer 7

• If CRS = Lyt; IRS = AtLyt
• New ideas depend on ideas in the previous period, the number of ideas and worker productivity
• δA(t+1) = zAtLat
• Resource Constraint: L_ = Lat + Lyt

Question 8

What are some shares of labour?

Answer 8

• Say a share of labour produces idear (lbar)
• Lat = lbarL_ and Lyt = (1-lbar)L_
• Where lbar and L_ are exogenous and Lat and Lyt are endogenous

Question 9

How can you solve the Romer Model?

Answer 9

• Substitute Lyt into the Yt= AtLyt formula
• This allows to find output per person; yt = Yt/L_
• This illustrates that output is not dependant on ideas per person and therefore non-rivalry
• Growth rate of knowledge (g~) is a constant, allowing us to find that zLat = zlbarL_
• As knowledge evolves, we see geometric progression: At = A0(1+g)^t
• Substituting in At to Yt, we find Yt = A0(1+g)^t(1-lbar)

Question 10

Prove that δyt = gbar

Answer 10

• δyt = δyt+1 / yt; Substituting in 1+ gbar - 1/1 = gbar

Question 11

What are some properties of growth?

Answer 11

• No DMR as ideas are non-rivalrous
• Differs from solow [k=rivalrous]

Question 12

What happens when L_ (population size) increases?

Answer 12

• g~ = ZlbarL_: as L_ rises, g~ increases
• Yt = A0 (1-lbar)(1+g~)^t, as g_ increases, yt increases

Question 13

What happens when lbar (research sector) increases?

Answer 13

• g~ = ZlbarL_: As lbar rises, g~ increases
• Yt = A0 (1-lbar)(1+g~)^t, as g_ increases, yt increases- BUT as lbar rises, yt falls
• This means that there is an initial loss and later increase

Question 14

Do larger countries grow faster?

Answer 14

• KNOWLEDGE SPILLOVER: US (2%) Vs Luxembourg (2.7%); which implies that people can trasnfer knowledge from bigger nation to smaller nation

Question 15

How can economic growth become sustainable?

Answer 15

• Growth can become less resource intensive due to greater efficiency
• Data suggests that the prices of industrial commodities have fallen since the 1920s
• Rapid inustrialisation [India+China] temporarily impacted this

Question 16

How can you combine the Solow/Romer Model?

Answer 16

• Combining the production function; Yt = AtKt^aLyt(1-a)
• Ideas: Long-run growth along a balance growth path
• Capital: transition dynamics before the balance growth path, where the BGP acts as a steady staete
• Model has DMR on capital

Question 17

What happens when s increases?

Answer 17

• BGP of income increases
• Current income steadies
• Economy is below the new BGP
• g~ of Y per capita increases- slope of output opath >slope of BGP

Question 18

What determines the slope of the line?

Answer 18

• Slope is always determined by g

Question 19

What are some sources of growth?

Answer 19

• At, Kt, Lyt
• We can use growth accounting to sources of growth and how this may change
• ANALYSE Growth rates of variables