Week 4: Romer Model Flashcards
Romer Model
growth model with technological change (accumulation of knowledge) as the endogenous variable
What does the Romer model divide the world into?
Objects - capital and labour from solow model - finite
Ideas - items used in making objects - virtually infinite
What do the first and second welfare theorems explain?
Perfectly competitive markets lead to efficient allocation of resources
Ideas Definition in Romer Model
instructions for using raw materials in different ways
Objects Definition in Romer Model
raw materials
Rivalrous (context of model)
one person’s use reduces the usefulness to someone else
Nonrivalrous (context of model)
one persons use does not reduce the usefulness to someone else
Are objects and ideas rivalrous or non-rivalrous?
Objects - rivalrous
Ideas - non- rivalrous
Excludability
legal restrictions on use of a good or idea
Ideas are nonrivalrous but can be excludable
Increasing Returns to Scale
when a double in inputs (capital and labour) causes the output to more than double
What do new ideas depend on? (3)
Existence of ideas in previous period
Number of workers producing ideas
Worker productivity
Equation for new ideas in Romer model
Romer Model Equation
Equation for labour in Romer model
How to express the endogenous labour variables in term of parameters?
L(at) = lL (lower case l - both have lines above) - parameter
Romer Model - Output per person
What does output per person depend on in the Romer model?
stock of knowledge
Romer model - constant growth rate of knowledge
Growth rate of technology equation
Stock of knowledge equation
How to solve Romer model
Combine output per person equation and stock of knowledge equation
Why is there growth in the Romer model? (3)
- Does not have diminishing returns to ideas because non-rivalrous
- Labour and ideas have increasing returns together
- Returns to ideas are unrestricted
What happens to economy in Romer model when population changes?
Changes in population = changes in growth rate of knowledge
Increase in population = immediately and permanently raises the growth rate of per capita output
What happens to economy in Romer model there is a change in research share?
Increase in l = increase g and lower L = yt decreases = g has increased n future = y(t) increases
What are growth effects?
Changes to the rate of growth of per capita output
What are level effects?
Changes in the level of per capita GDP
Aspects of combined Solow-Romer model (2)
- non rivalry of ideas results in long-run growth along a balances growth path
- exhibits transition dynamics if economy is not on balanced growth path
How do you combine the Solow and Romer models?
Add capital into the Romer model production function
5 unknowns in the Solow and Romer combined model
5 equations in the Solow and Romer combined model
Increase in Population Equation - Romer Model
Increase in population diagram - Romer model
Change in Research Share Romer Model - equation
Change in Research Share Romer Model - Diagram
Growth Effects vs Level Effects
Growth effects: changes to the rate of growth of per capita output
Level Effect: changes in the level of per capita GDP
What happens if the exponent on ideas is not equal to 1? (2)
- there will be sustained growth
- growth effects will be eliminated
What does growth accounting determine?
the sources of growth in an economy and how they may change over time
Applied growth rate rules to the production function (equation)
Adjusted growth growth rates by labour hours (equation)
What does the combined Solow-Romer model result in? (2)
- Balanced growth path - A(t) increases continually over time
- Long run growth
Solving combined model for growth rate of knowledge equation
Solving combined model for growth rate of capital equation
Plugging growth rates of capital and knowledge into equation
Solving combined model for the growth rate of output
What does the equation for the growth rate of output in the combined model show? (2)
- growth rate of output
- growth rate of output per person
Why is growth rate of output higher in the combined model compared to the Romer model? (3)
- ideas have a direct and indirect effect
- Increasing productivity raises output because productivity has increased
- high productivity = higher capital stock
Capital-to-output ratio equation
Substitute capital-to-output ration back into production function
Transitional dynamics in the combined model
- the further below the balanced growth path an economy is, the faster the economy will grow
- the further above the balanced growth path an economy is the slower the economy will grow
What happens in the combined model when there is a permanent increase in investment rate?
- Balances grwoth path of income is higher
- current income is unchanged
- economy is now below the new balances growth path
