SEM 1 - LEC 5 - FRONTIER GROWTH AND ROMER MODEL Flashcards
in growth accounting what’s the final output Yt when its produced using stocks of physical capital Kt and human capital Ht
what’s the equation for the total factor productivity measured in labour-augmenting units
what happens if you divide the total factor productivity measured in labour-augmenting units by the aggregate amount of hours worked by everyone in the economy, Lt,
what’s non residential capital and residential capital
Non-residential capital: equipment and structures.
Residential capital: new housing.
what’s the different types of investment
Investment share in equipment: new machinery, vehicles, computers;
Investment share in structures: new buildings.
what’s the process learning by doing
The more people there are searching for new ideas, the more likely it is that discoveries will be made: ideas coming from research or from the production process itself
The production of new ideas plays a fundamental role in the modern understanding of growth
what’s a patent
A patent provides a right under law to produce and market a good for a specified period of time.
The output of ideas is very hard to measure → patents is a commonly used measure.
In production function (1), we saw that the total factor productivity is split into two pieces: the stock of ideas, A, and everything else, labeled by M. what’s M??
We interpret M as misallocation
When resources are allocated optimally, the economy will operate on its production possibilities frontier.
When resources are misallocated, the economy will operate inside this frontier.
Thus, TFP will be lower, that is, a given quantity of inputs will produce less output.
what’s an example of misallocation
Consider a country that has only two firms that import and resell automotive parts (for example, spark plugs).
One firm is a new start-up that uses modern inventory management techniques.
The other is an older, established company run by the prime minister’s cousin.
Allowed to compete freely, the new start-up would probably thrive, taking substantial business away from the established firm and increasing the economy’s productivity.
However, political connections prevent this from happening: the new firm cannot get the necessary licenses to import parts from abroad and is not allowed to expand.
The result is that the new firm gets little capital and labour whereas the old firm gets too much.
This misallocation means that the industry’s capital and labour is less productive than it otherwise should be, that is, it has a lower TFP.
what happens as people get richer, the marginal utility of consumption falls
people substitute away consumption towards actions that conserve on the precious time endowment → time is the one thing that technological progress cannot create.
whats the difference between objects and ideas
Objects include most goods that we are familiar with, such as land, cell phones, oil, jet planes, computers, pencils as well as capital and labour from the Solow model.
Ideas, in contrast, are instructions or recipes. Ideas include design for making objects. e.g. design of a phone
what’s the idea diagram
are objects and ideas rival or non rival
Objects (cell phones, computers, pencils…) are rival: that is, one person’s use of a particular object reduces its inherent usefulness to someone else.
Ideas are non-rival: the fact that an individual uses an idea does not reduce the “amount” of the idea available for another individual.
Example:
The computer is rival: the use of it by an individual reduces the potential benefit to another individual from using the same computer.
The design for a computer is non-rival: assuming a factory with more assembly lines, the design for a computer does not need to be re-invented for each production line.
what’s excludability
Excludability refers to the extent to which someone has property rights over a good (in this case, an idea) and is legally allowed to restrict the use of that good.
what does the new production function look like with knowledge
what would happen if the pharmaceutical company were forced to charge a price equal to the marginal cost?
what does the production function for new ideas show
Differently from ideas, workers are rival: if a worker spends time producing automobiles, that time cannot be simultaneously spent conducting research on antibiotics. what does the resource constraint tell us
Equation (7) tells us that the number of workers producing output and the number of workers producing ideas add to the total population, L ̄, that is a constant parameter.
what’s the equation for the allocation of labour
what is the production function expressed in output per person equation and what’s it tell us
what’s the stock of knowledge given by
what can output per person be written as in the romer model
does Output per person in the Romer model grow at a constant rate.
yes
Let’s consider an exogenous increase in the population, L ̄ holding all
other parameter values constant. what happens
An increase in the population increases the growth rate of the economy.
what are the effects if the research share increases
what are the effects if the research share increases
Changing the research share, l ̄ (cont.) An increase the research share has two effects.
Firstly, the growth rate after 2030 is higher: change in the slope of the orange curve as opposed to the dashed green line in which no change occurs.
Secondly, the initial level of output per person declines: in 2030, the level of output per person falls temporarily before growing again.
An economy needs researchers to produce ideas in order to raise future income, but it also needs workers to produce output today in order to satisfy future consumption.
There would still be increasing returns overall, but there would also be diminishing returns to ideas alone.
