Unit 4: Endogenous growth

Question 1

Why does technological progress generate growth in the Solow-Swan model?

Answer 1

It offsets diminishing MPK by increasing the productivity of labour

Question 2

In general how can sustained growth in output-per-capita be achieved?

Answer 2

By a mechanism that off-sets or shuts down the effect of diminishing MPK

Question 3

What is the name of the model whereby growth is achieved endogenously?

Answer 3

The AK model

Question 4

What is the main difference between the Solow Swan and the AK model?

Answer 4

They have different production functions:

Solow Swan: Y(t) = Y=K^αL^(1−α)

AK: Y (t) = AK (t)

Question 5

One of the features of the AK production technology is that the marginal
product of capital equals…

Answer 5

A

Question 6

Does the AK production function exhibit diminishing returns to capital?

Answer 6

No since A is a constant

Question 7

True or False:

In the AK model, growth in output-per-capita is occurring endogenously and not as a consequence of technology increasing exogenously over time.

Answer 7

True

Question 8

Provided sA is greater than δ, the economy will grow over time at what rate?

Answer 8

sA − δ, regardless of whether it is rich or poor

Question 9

True or False:

Unlike the Solow-Swan model, the AK
model suggests that countries with higher saving rates will tend to grow more rapidly and that higher growth can be achieved by policies designed to encourage a higher saving rate.

Answer 9

True!

Question 10

What is one of the factors that determines how quickly output-per-capita grows in the AK

Answer 10

The savings rate

Question 11

If a steady state is unstable, what does this imply about convergence in the economy

Answer 11

It is not a point to which the economy converges over time

Question 12

What exactly are technologies?

Answer 12

They are things that are used to convert factors of production- capital and labour- into goods

Question 13

What can an “improved technology” be defined as?

Answer 13

One that allows the same factors of production to produce more goods

Question 14

What can help define a “good”?

Answer 14

The extent to which they are rivalrous and excludable

Question 15

A good is considered to be nonrivalrous if…

Answer 15

Its use by one person or firm does not prevent it from also being used by other people or firms

Question 16

Are ideas nonrivalrous or rivalrous goods?

Answer 16

nonrivalrous meaning the same idea can be used by many people at the same time

Question 17

How can you define if a good is considered excludable or not?

Answer 17

If the owner of the good can charge a fee for its use

Question 18

Are ideas excludable goods?

Answer 18

Partially yes as inventors can use patient protection laws to prevent the use of their idea by others for a time during which they can charge a fee for its use

Question 19

True or false:

The production of new ideas involves very high fixed-costs and very low marginal costs

Answer 19

True etc the development of a new drug

Question 20

What are the two implications of the presence of high fixed-costs and low marginal costs of production

Answer 20

1. It implies increasing-returns-to-scale in
   production
2. It implies imperfect competition: with low marginal
   costs setting the price equal to marginal costs (perfect competition) would lead to negative profits because the fixed costs of production would not be covered

Question 21

In the Romer’s model (the accumulation of ideas as a mechanism for growth), what does A(t) represent?

Answer 21

The stock of knowledge/ideas at time t

Question 22

True or False:

In the AK-model, long-run growth can be positive, negative, or zero and is influenced by the saving rate.

Answer 22

True!

Question 23

Does A(t) exhibit constant returns to scale in capital and labour in the Romers model?

Answer 23

No, since its endogenous it exhibits increasing returns to scale in capital, labour and ideas

Question 24

What is a key difference between the Solow-Swan model and the AK model vs. the Romers model?

Answer 24

The production of new ideas is allowed to occur endogenously

Question 25

What is the production function for new ideas?

Answer 25

A (t) = θ (t)LA (t),

Question 26

What does θ stand for in the Romers model production function?

Answer 26

The rate at which new ideas are discovered

Question 27

What might the rate at which new ideas are discovered depend on?

Answer 27

The existing stock of ideas:
θ (t) = θA (t)^φ

Question 28

What does the parameter φ represent? How can we think of it?

Answer 28

φ = 0: Stock of new ideas rising with the amount of labor hours spent on research and development.
φ > 0: Positive knowledge spillovers from the stock of existing ideas.

Question 29

How do you determine whether a model has a balanced growth path in which economic growth occurs?

Answer 29

Begin with the production function, rewrite in per-capital terms, then take log-derivatives wrt time, if a balanced growth path exists, then these growth rates must be equal and independent of time (focusing on long run growth)

Question 30

In the Romers model:

The rate of growth in output-per-capita,
gy, and the rate of growth in the capital-labor ratio, gk, depends on…

Answer 30

the rate of population growth, n, and the parameter, φ

Question 31

True or False: the Romers model and Solow Swan are very different but share the same conclusion

Answer 31

True: Macroeconomic policies designed to increase the saving rate, or the amount of expenditure on research and development will not
lead to higher economic growth

Question 32

What is a consequence of the Romers Model?

Answer 32

If population growth were to stop then so too would economic growth

Question 33

True or False;

To have sustained economic growth in this model, the number of new ideas must be rising over time.

Answer 33

True

Question 34

In the case where φ = 1, the production function for new ideas is:

Answer 34

A (t) = θA (t)LA (t)

Question 35

What does comparative statics in the Romers model involve looking at?

Answer 35

If there is an exogenous increase in the share of workers devoted to R&D what would happen?

Question 36

True or False:

Although the size of the R&D sector does not influence the model’s long run growth rate, it does effect the level of income- and consumption-perworker on the balanced growth path.

Answer 36

True!

Question 37

True or False:

Long-run growth can occur exogenously when the production function
is not neoclassical.

Answer 37

False, endogenously

Question 38

Why does long run growth occur in the AK model?

Answer 38

Becuase the production function has constant marginal product of capital

Question 39

Why does long run growth occur in the Romers model?

Answer 39

Because the production function has increasing returns to capital, labour, and technology.

Question 41

True or False:

In the AK model, there are no
transition dynamics, changes in the economy produce an immediate
shift from one balanced growth path to another.

Answer 41

True

Question 42

In Romer’s model, technology comes in the form of ___ which are the driver or engine for growth

Answer 42

Ideas

Question 43

True or False:

When growth is endogenous, neither convergence nor conditional convergence can be expected to hold.

Answer 43

True

Question 44

What is the concept of “learning-by-doing” in the context of endogenous growth?

Answer 44

It suggests that productivity increases as more production occurs, with knowledge and understanding of the production process improving as by-products of production itself.

Question 45

What is the optimal size of the R&D sector according to Romer’s model?

Answer 45

The optimal size of the R&D sector, to maximize the level of consumption-per-worker on the balanced growth path, is determined by the share of workers in the R&D sector equal to 1/(2−φ).

Question 46

What key conclusion do both the AK model and Romer’s model share regarding endogenous growth?

Answer 46

Both models show that long-run growth can occur endogenously under certain conditions, such as through constant marginal product of capital (AK model) or increasing returns to scale (Romer’s model), without relying on exogenous technological progress.