Week 4: Romer Model

Question 1

Romer Model

Answer 1

growth model with technological change (accumulation of knowledge) as the endogenous variable

Question 2

What does the Romer model divide the world into?

Answer 2

Objects - capital and labour from solow model - finite

Ideas - items used in making objects - virtually infinite

Question 3

What do the first and second welfare theorems explain?

Answer 3

Perfectly competitive markets lead to efficient allocation of resources

Question 4

Ideas Definition in Romer Model

Answer 4

instructions for using raw materials in different ways

Question 5

Objects Definition in Romer Model

Answer 5

raw materials

Question 6

Rivalrous (context of model)

Answer 6

one person’s use reduces the usefulness to someone else

Question 7

Nonrivalrous (context of model)

Answer 7

one persons use does not reduce the usefulness to someone else

Question 8

Are objects and ideas rivalrous or non-rivalrous?

Answer 8

Objects - rivalrous

Ideas - non- rivalrous

Question 9

Excludability

Answer 9

legal restrictions on use of a good or idea

Ideas are nonrivalrous but can be excludable

Question 10

Increasing Returns to Scale

Answer 10

when a double in inputs (capital and labour) causes the output to more than double

Question 11

What do new ideas depend on? (3)

Answer 11

Existence of ideas in previous period
Number of workers producing ideas
Worker productivity

Question 12

Equation for new ideas in Romer model

Answer 12

Question 13

Romer Model Equation

Answer 13

Question 14

Equation for labour in Romer model

Answer 14

Question 15

How to express the endogenous labour variables in term of parameters?

Answer 15

L(at) = lL (lower case l - both have lines above) - parameter

Question 16

Romer Model - Output per person

Answer 16

Question 17

What does output per person depend on in the Romer model?

Answer 17

stock of knowledge

Question 18

Romer model - constant growth rate of knowledge

Answer 18

Question 19

Growth rate of technology equation

Answer 19

Question 20

Stock of knowledge equation

Answer 20

Question 21

How to solve Romer model

Answer 21

Combine output per person equation and stock of knowledge equation

Question 22

Why is there growth in the Romer model? (3)

Answer 22

• Does not have diminishing returns to ideas because non-rivalrous
• Labour and ideas have increasing returns together
• Returns to ideas are unrestricted

Question 23

What happens to economy in Romer model when population changes?

Answer 23

Changes in population = changes in growth rate of knowledge

Increase in population = immediately and permanently raises the growth rate of per capita output

Question 24

What happens to economy in Romer model there is a change in research share?

Answer 24

Increase in l = increase g and lower L = yt decreases = g has increased n future = y(t) increases

Question 25

What are growth effects?

Answer 25

Changes to the rate of growth of per capita output

Question 26

What are level effects?

Answer 26

Changes in the level of per capita GDP

Question 27

Aspects of combined Solow-Romer model (2)

Answer 27

- 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

Question 28

How do you combine the Solow and Romer models?

Answer 28

Add capital into the Romer model production function

Question 29

5 unknowns in the Solow and Romer combined model

Answer 29

Question 30

5 equations in the Solow and Romer combined model

Answer 30

Question 31

Increase in Population Equation - Romer Model

Answer 31

Question 32

Increase in population diagram - Romer model

Answer 32

Question 33

Change in Research Share Romer Model - equation

Answer 33

Question 34

Change in Research Share Romer Model - Diagram

Answer 34

Question 35

Growth Effects vs Level Effects

Answer 35

Growth effects: changes to the rate of growth of per capita output Level Effect: changes in the level of per capita GDP

Question 36

What happens if the exponent on ideas is not equal to 1? (2)

Answer 36

- there will be sustained growth | - growth effects will be eliminated

Question 37

What does growth accounting determine?

Answer 37

the sources of growth in an economy and how they may change over time

Question 38

Applied growth rate rules to the production function (equation)

Answer 38

Question 39

Adjusted growth growth rates by labour hours (equation)

Answer 39

Question 40

What does the combined Solow-Romer model result in? (2)

Answer 40

- Balanced growth path - A(t) increases continually over time - Long run growth

Question 41

Solving combined model for growth rate of knowledge equation

Answer 41

Question 42

Solving combined model for growth rate of capital equation

Answer 42

Question 43

Plugging growth rates of capital and knowledge into equation

Answer 43

Question 44

Solving combined model for the growth rate of output

Answer 44

Question 45

What does the equation for the growth rate of output in the combined model show? (2)

Answer 45

- growth rate of output | - growth rate of output per person

Question 46

Why is growth rate of output higher in the combined model compared to the Romer model? (3)

Answer 46

- ideas have a direct and indirect effect - Increasing productivity raises output because productivity has increased - high productivity = higher capital stock

Question 47

Capital-to-output ratio equation

Answer 47

Question 48

Substitute capital-to-output ration back into production function

Answer 48

Question 49

Transitional dynamics in the combined model

Answer 49

- 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

Question 50

What happens in the combined model when there is a permanent increase in investment rate?

Answer 50

- Balances grwoth path of income is higher - current income is unchanged - economy is now below the new balances growth path