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EC1B3 > Week 4: Romer Model > Flashcards

Week 4: Romer Model Flashcards

1
Q

Romer Model

A

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

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2
Q

What does the Romer model divide the world into?

A

Objects - capital and labour from solow model - finite

Ideas - items used in making objects - virtually infinite

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3
Q

What do the first and second welfare theorems explain?

A

Perfectly competitive markets lead to efficient allocation of resources

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4
Q

Ideas Definition in Romer Model

A

instructions for using raw materials in different ways

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5
Q

Objects Definition in Romer Model

A

raw materials

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6
Q

Rivalrous (context of model)

A

one person’s use reduces the usefulness to someone else

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7
Q

Nonrivalrous (context of model)

A

one persons use does not reduce the usefulness to someone else

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8
Q

Are objects and ideas rivalrous or non-rivalrous?

A

Objects - rivalrous

Ideas - non- rivalrous

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9
Q

Excludability

A

legal restrictions on use of a good or idea

Ideas are nonrivalrous but can be excludable

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10
Q

Increasing Returns to Scale

A

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

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11
Q

What do new ideas depend on? (3)

A

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

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12
Q

Equation for new ideas in Romer model

A
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13
Q

Romer Model Equation

A
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14
Q

Equation for labour in Romer model

A
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15
Q

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

A

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

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16
Q

Romer Model - Output per person

A
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17
Q

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

A

stock of knowledge

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18
Q

Romer model - constant growth rate of knowledge

A
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19
Q

Growth rate of technology equation

A
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20
Q

Stock of knowledge equation

A
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21
Q

How to solve Romer model

A

Combine output per person equation and stock of knowledge equation

22
Q

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

A
  • Does not have diminishing returns to ideas because non-rivalrous
  • Labour and ideas have increasing returns together
  • Returns to ideas are unrestricted
23
Q

What happens to economy in Romer model when population changes?

A

Changes in population = changes in growth rate of knowledge

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

24
Q

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

A

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

25
Q

What are growth effects?

A

Changes to the rate of growth of per capita output

26
Q

What are level effects?

A

Changes in the level of per capita GDP

27
Q

Aspects of combined Solow-Romer model (2)

A
  • 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
28
Q

How do you combine the Solow and Romer models?

A

Add capital into the Romer model production function

29
Q

5 unknowns in the Solow and Romer combined model

A
30
Q

5 equations in the Solow and Romer combined model

A
31
Q

Increase in Population Equation - Romer Model

A
32
Q

Increase in population diagram - Romer model

A
33
Q

Change in Research Share Romer Model - equation

A
34
Q

Change in Research Share Romer Model - Diagram

A
35
Q

Growth Effects vs Level Effects

A

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

36
Q

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

A
  • there will be sustained growth

- growth effects will be eliminated

37
Q

What does growth accounting determine?

A

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

38
Q

Applied growth rate rules to the production function (equation)

A
39
Q

Adjusted growth growth rates by labour hours (equation)

A
40
Q

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

A
  • Balanced growth path - A(t) increases continually over time
  • Long run growth
41
Q

Solving combined model for growth rate of knowledge equation

A
42
Q

Solving combined model for growth rate of capital equation

A
43
Q

Plugging growth rates of capital and knowledge into equation

A
44
Q

Solving combined model for the growth rate of output

A
45
Q

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

A
  • growth rate of output

- growth rate of output per person

46
Q

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

A
  • ideas have a direct and indirect effect
  • Increasing productivity raises output because productivity has increased
  • high productivity = higher capital stock
47
Q

Capital-to-output ratio equation

A
48
Q

Substitute capital-to-output ration back into production function

A
49
Q

Transitional dynamics in the combined model

A
  • 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
50
Q

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

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

EC1B3 (10 decks)

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