Term 2 week 3 Romer Model

Question 1

What does the Romer model seek to investigate?

Answer 1

Can endogenous technology growth be an engine for long-term growth

TFP is endogenous

Question 2

How did Romer classify factors of prodiuction?

Answer 2

He split it into objects and ideas
objects - physical items
Ideas - research etc

Question 3

What is particular about ideas and what implication does that have on TFP?

Answer 3

Objects are non-rival so they have increasing returns to scale

Question 4

Why do ideas have increasing returns to scale in production?

Answer 4

One person using an idea does not diminish the ability of someone else using it, so the same idea can be used an input multiple times.

So when mixed with objects it causes IRS

Question 5

How are ideas different from objects?

Answer 5

-Ideas are infinite whilst objects are finite
-Ideas are non-rival, but also exlcudable due to patents.

Question 6

What is an example of non-rival ideas causing increasing returns to scale?

Answer 6

The creation of a drug, 1st dose costs 2.5 billion
-1 does in 10$ in production costs
that means after producing 1 dose the cost is lower as ideas are non rival and the idea can be used again

Question 7

How can you prove that endogenous TFP production model has IRS?

Answer 7

You multiply all the inputs by lamda and show that the new production function is greater than the original production

Question 8

What is the impact of non-rival ideas on compeitition

How can you prove matehmatically that firm will not innovate under perfect competition.

Answer 8

Innovation requires firms to pay an addiitional fixed cost
If new ideas can be used by everyone no need to incur the fixed cost to start with.

Solving maximisation problem of firms

Question 9

What is the implication on perfect competition on consumers?

What are tools that can encourage people to innovate?

Answer 9

Firms must have imperfect competition in order to innovate.

Patents (often temporary)
Copyrights
Trade secrets protected by NDAs

However, market power creates inefficiencies

Question 10

What is the set-up of the simple romer model?

What is the model?

What returns to scale?

Answer 10

Two sectors in the economy, industrial and R&D

labour is employed to produce new goods lyt
or to produce new ideas lat
l bar = lyt + lat

production function
Yt = At . Lyt

At is ideas
Lyt is human capital into production of objects.

CRS in objects and ideas alone but IRS in both together

Question 11

What is the research and development sector in the romer model?

Answer 11

Lat = lbar . L bar
where lbar is the share of labour force employed in new ideas.

Question 12

What is the change in the stock of ideas?

Answer 12

delta At+1 = zbar . At . Lat
Z productivity of research sector
At = initial stock of ideas
Lat share of labour force in research sector

Question 13

How can you graphically show that ideas are non rival what are the functions?

Answer 13

X axis input
Y axis output

Constant returns to scale Y= X/10
Then increasing returns to scale X-F / 10
Average product rises as scale of production rises Y/X

Question 14

What is output per worker in romer model?

What is the growth rate of new ideas and how is it found?

Answer 14

yt = At(1-fatl)

you start with the flow of new ideas
delta At+1 = z bar . At . lat

Then you divide by At to find the growth rate of new ideas
delta At+1/ At = Z bar . Lat

Question 15

What is the growth rate of knowledge?

Answer 15

g = zbar . fat l. L bar

Question 16

What is the stock of knowledge?

Answer 16

At = A0 + (1+g)t

Question 17

Is the growth rate of ideas constant or changing over time?

Answer 17

Constant as z bar fat l bar and L bar are all exogenous

Question 18

How else can you present output per worker in the romer model?

Answer 18

you get the output per worker function
yt = At . (1-fat l bar)Lbar
then sub in At
then you get
yt = A bar 0 (1- fat l bar)(1+g)^t

Question 19

What are the conclusions of the romer model?

How do you increae growth in the romer model?

Answer 19

It is possible to get long term growth through endogenous technology.

As ideas are non rival and there are no diminishing returns to technology.

Increase number of researchers - education
Increase productivity - intellectual property rights.

Question 20

What is the impact of an increase in the population on Romer model?

Explain graphically?

What type of question is this?

Answer 20

Comparative statics

g = z bar . fat l bar . L bar

-if population increases it causes growth rate of ideas to increase

• as output per worker
  yt = A0(1-fatlbar)(1+g)^t

Assume that before the population growth the time output line is constant
an increase in g increases the gradient of the line and therefore output increases

Question 21

How do you make an exponential growht linear?

Answer 21

use a ratio scale

Question 22

What is the impact of increasing the proportion of researchers in the economy on the romer model?

Graphically?

Answer 22

g = zbar . l bar . L bar

increasing researchers increases growth rate

However, as in
yt = A0(1-lbar)(1+g)^t

it decreases the amount of industrial workers.

This decreases the level of output on impact
but permanently increases the growth rate of per capita output

The curve falls below trajectory but then the gradient increases and grows past the initial line

Question 23

What is the impact of encouraging more people to become researchers in the Romer economy?

Answer 23

Trade off as it decreases output today to increase output in the future

Question 24

What are the policy implications of increasing proportion of researchers in romer model?

Answer 24

-labour force composition matters
-Education level matters

Question 25

What does the data show about growth rate and education?

Answer 25

Years of schooling and growth rate has a correlation