Lecture 2 - Growth and Ideas Flashcards
(24 cards)
What is the key driver of long-run growth in the Romer model?
New ideas (technology, recipes, etc.), which are nonrivalrous and exhibit increasing returns to scale.
What does nonrivalry mean in the context of ideas?
One person’s use of an idea does not diminish its usefulness to others (e.g., software code, mathematical theorems).
How does the Romer model differentiate between objects and ideas?
Objects (capital, labor) are rivalrous; ideas are nonrivalrous and infinitely reusable.
What is the production function in the Romer model?
Y_t = A_t * L_yt (output depends on knowledge A_t and labor in production L_yt).
What is the idea production function in the Romer model?
ΔA_t+1 = z̄ * A_t * L_at (new ideas depend on existing knowledge and labor in research L_at).
What is the growth rate of knowledge (ḡ) in the Romer model?
ḡ = z̄ * l̄ * L̄ (depends on research productivity z̄, fraction of labor in research l̄, and total labor L̄).
How does per capita output grow in the Romer model?
At rate ḡ (equal to the knowledge growth rate), sustained indefinitely.
What happens if the share of labor in research (l̄) increases?
Higher ḡ (faster growth) but lower current output (fewer workers in production).
What is the key difference between the Solow and Romer models?
Solow: Diminishing returns to capital. Romer: No diminishing returns to ideas (sustained growth).
What is increasing returns to scale (IRS)?
Doubling inputs more than doubles output (common in idea production due to high fixed costs).
What is the combined Solow-Romer production function?
Y_t = A_t * K_t^α * L_yt^(1-α) (combines capital accumulation and idea-driven growth).
What is the effect of a higher saving rate in the combined Solow-Romer model?
Temporarily increases growth during transition to a higher balanced growth path (level effect).
What is growth accounting?
Decomposes output growth into contributions from TFP, capital, and labor (g_Y = g_A + αg_K + (1-α)g_L).
How is TFP growth calculated?
TFP growth = Output growth - (α * capital growth + (1-α) * labor growth).
What is the role of patents in the Romer model?
Encourage innovation by granting temporary monopoly power (P > MC), but create welfare loss.
Why might large and small countries grow at similar rates?
Knowledge spillovers allow small countries to benefit from ideas developed elsewhere.
What is the balanced growth path in the Romer model?
All variables grow at constant rates (no steady state, unlike Solow).
What happens if population (L̄) increases in the Romer model?
Permanently raises ḡ (more researchers) and thus long-run growth.
What is the trade-off in allocating labor to research vs. production?
More research → higher future growth but lower current output.
How does the Romer model address sustainability of growth?
Ideas reduce resource dependency (e.g., efficiency gains), enabling sustained growth.
What is the key takeaway from the antibiotic example in the lecture?
High fixed R&D costs lead to IRS (average cost falls as output scales).
What is the difference between excludable and non-excludable ideas?
Excludable: Use restricted (e.g., proprietary software). Non-excludable: Free to use (e.g., open-source).
How does the Romer model explain cross-country growth differences?
Variation in research investment (l̄), population (L̄), or idea productivity (z̄).
What is the principle of transition dynamics in the combined Solow-Romer model?
Economies grow faster if below their balanced growth path, slower if above.
