Week 4 Flashcards
Why does the Romer model lead to long run economic growth?
The nonrivalry of ideas leads to increasing returns, and thus to a theory of sustained growth in stock of knowledge → sustained growth in GDP per capita
- balanced growth path, NOT steady state anymore
^technological growth, new ideas is the main engine
Solow vs Romer
Output per person depends on…
Solow: capital per person
Romer: stock of knowledge
(change in) New ideas formula
Δ At+1 = z̅ At Lat
Growth rate of knowledge (constant)
g̅ = z̅ ℓ̅ L̅
Output per person formula (Romer)
yt = At (1 - lbar) yt = A0 (1 - lbar) (1 + g bar)^t
In the Romer model, what are the 2 ways we can increase growth rate & GDP per capita?
- Increase population
2. Increase fraction of workers in research (research share)
Combined Solow-Romer model
Growing faster if an economy is farther below its balanced growth path. Once get “there” will grow at constant rate.
- has the principle of transition dynamics + balanced growth path
What causes transition dynamics in Solow model?
Diminishing returns to capital
Combined Solow-Romer model
What happens if we increase s bar (investment rate)?
If increase sbar (investment rate), GDP per capita jumps up for every year. So will have transition dynamics & growth of GDP per capita immediately increases to higher constant rate, to reach the new balanced growth path (higher, parallel shift up).
Combined Solow-Romer model
Why is output higher in the combined model than in the Romer model?
The only difference between Romer and combined model is capital accumulation.
So, output is higher in combined model b/c Direct effect of growth in knowledge on output growth. Growth in output then leads to capital accumulation, which in turn leads to more output growth. (same idea for: due to increase in productivity)
