week 4 Flashcards
What does the Romer model divide the world into?
Are these finite or infinite?
- Objects
- Ideas
Objects are finite and produced using K and L
Ideas are infinite
What is nonrivalry?
How does this apply to objects and ideas?
Nonrivalry alludes to spontaneous consumption
Objects are rivalrous - You cannot eat my apple
Ideas are nonrivalrous
What is excludability?
Are ideas excludable?
Legal restrictions on use of good ideas
-> Laws and regulations
Ideas are difficult to exclude but it is possible
Do ideas have an increasing scale to return?
Yes:
1. Too develop the idea, it requires a lot of upfront investment
2. Once created, very easy to produce
RnD of vaccines is very high but once made they can be mass produced
What are the problems with pure competition?
They call it Pareto optimal consumption
- Cannot make someone better without making someone worse off
- Perfect competition leads to this because of P = MC
Zero Sum game
Why should I spend billions to make vaccine if I get 0
How do we fix the problems associated with perfect competition?
How does this help? What is the problem with this?
By granting “temporary monopolies” on idea usage
Incentivises RnD
The problem is that P>MC resulting in welfare loss
Patents
What is welfare loss?
Economic term for inefficiency in the market
What is the consumption function associated with the Romer model?
What is the return to scale?
Y(t) = A(t)L(yt)
Constant returns to scale
What is the equation relating to the growth ideas?
Explain it intuitively?
ΔA(t+1) = z A(t)L(at)
New Ideas depend on:
1. Existence of old ideas
2. L producing ideas
3. Workers productivity
z is the workers productivity
L(at) is the portion of L producing ideas
What is the equation which show the total labour force as as sum of its components?
L(at) + L(yt) = L
L(at) is the number of workers focussed on the production of new ideas whereas L(yt) is the number of workers focussed on production.
What is the equation linking the proportion of people to the total labour?
L(at) = l L
where l is the fraction of the total labour force engaged in the production of new ideas.
Therefore, we can also write:
L(yt) = (1-l) L
What is the equation for the output per person?
y(t) = Y(t) / L = A(t) L(yt) / L = A(t) (1-l)
Output per person depends on the stock of knowledge
What is the equation for the growht rate of ideas?
With derivation
growth rate = ΔA(t+1)/A(t) = z L(at) = z L l
What is the equation linking the growth rate and the stock of knowledge?
-> What is the equation linking output and growth rate?
A(t) = A(0) (1+g)^t
y(t) = A(0)(1-i)(1+g)^t
Where A(0) is the initital knowledge
What are growth rates in the Romer model?
How do changes in L and l affect growth and teh graph of y?
The growth rate is constant
Increasing L increases the gradient of the line at the point
Increasing l pivots the line to become more steep; there is initially a drop to the output since it take time for ideas to flourish (intuition)
