Endogenous Growth Flashcards
(9 cards)
What is the firms production function in the AK model? What is the result of the AK model featuring constant returns to capital and how does this differ from the solow model?
Production function: Y=AK
We get that
g(Y)=sA-δ where g(Y) is the growth rate of output. Thus, the economy can growth forever id sA>δ. This is a result of having constant returns to scale, as opposed to the solow model that features decreasing returns to scale
What is meant by the positive externality of capital result in the AK model?
The AK model says that capital is not just a useful input in itself, but it has positive externalities - when more capital is used, workers learn and gain knowledge about the production process which can spawn new technology.
What are the three sectors in the Romer model?
Final goods sector: Produces final goods using labour and intermediate goods. Perfectly competitive.
Intermediate sector: Produces intermediate goods using patents and capital. Patents are purchased from the research sector. This sector has monopolistic competition and firms earn profits.
Research sector: Hires research workers to produce new patents. Firms can earn a profit selling patents to the intermediate sector.
In solving the Romer model, what do we find about the growth rates of output, capital and technological progress and what does it mean?
On the BGP we find that g(Y)=g(K)=g(A). In the model it is technological progress (A), which is endogenous, that drives growth.
How does the size of the research sector depend on the interest rate and growth rate of technology?
In the model we solve for the size of the research sector [S(R)]. It shows that if g(A) rises then the research sector becomes larger. If technological progress occurs at a higher rate, the size of the research sector increases. It also shows that the size of the research sector is decreasing in the interest rate. An increase in the interest rate decreases the price of patents, as the price of patents is equal to the PV of profits from the patent - thus heavier discounting reduces the price.
When thinking about the size of the research sector [S(R)], how does the rate of research success impact the size of the research sector?
When the rate of research success (theta) increases, it is easier to generate profits in the research sector so the size of the research sector increases.
How does the size of the research sector impact the growth rate of technology and the level of technology (A)?
As size of the research sector increases, both the growth rate and level of technology.
How does the size of the research sector impact the growth rate of output?
On the BGP g(A)=g(Y) therefore an increase in the size of the research sector increases the growth rate of output.
Suppose there was a one time increase in the productivity of research (rate of research success), what happens to the growth rate and level of technology over time?
An increase in the rate of research success increases the size of the research sector, and thus causes a one time increase in the growth rate of technology. Thus, the level of technology will increase over time at a higher rate.
